England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand. London WC2A 2LL
		15 May 2009

MR MARTIN QC:

1. These proceedings raise once again the much-litigated problems of how far a director may go in the way of making preparations for future competition against the company of which he is a director, and how far the company is able to restrain such competition after the resignation of the director in the absence of a restraint covenant.
2. The claimants are two related companies: G Attwood Holdings Ltd ("GAHL") and its wholly-owned subsidiary M&E Group Ltd ("MEGL"). The first defendant, Gordon Woodward ("Mr Woodward"), was formerly a director of both claimants, and, as its operations director, was responsible for the day-to- day management of the business of MEGL. As well as being a director, he was employed by MEGL under a written contract of employment. The second defendant, Stephen Gwilliam ("Mr Gwilliam"), was formerly employed by MEGL as management accountant. The third defendant, Logistics & Technical Solutions Ltd ("LTSL"), is a company incorporated on Mr Woodward's instructions on 3 July 2008.
3. The claimants' basic contention is that Mr Woodward and Mr Gwilliam, having formed the intention to leave MEGL and set up business together in competition to MEGL through the medium of a new company, took steps to that end before they left that amounted to breaches of their duties as employees and (in the case of Mr Woodward) his duties as director.
4. Shortly before the trial began, the claimants came to terms with Mr Gwilliam. The proceedings accordingly continued against Mr Woodward and LTSL alone. However, Mr Gwilliam gave evidence on their behalf; and that evidence, and the part he played in the preparations for the establishment of LTSL, are of substantial importance to the resolution of the issues that arise.
5. MEGL was incorporated in 2000. Its business is the provision of engineering and technical personnel, such as mechanics, to support the military operations of prime contractors to the US Department of Defense ("DoD"), or of the DoD itself, in places such as Afghanistan, Iraq, Kuwait and Germany. On 9 September 2002 Mr Woodward was employed by MEGL as operations director. He had valuable and long experience of working closely with the US military, primarily in Germany. The written statement of the terms of his employment, which was signed by Mr Woodward on 20 July 2004, incorporated the terms of MEGL's employee handbook. Neither the written statement itself, nor the employee handbook, contained any inhibition on Mr Woodward's ability to work after the termination of his employment. The employee handbook did, however, contain provisions relating to the confidentiality of business information acquired during or in the course of Mr Woodward's employment; and those provisions, and the provision relating to copyright in written material, required the return of any documents held by an employee on termination of employment.
6. On 19 March 2004 Mr Woodward became a director of GAHL, and from about May of that year Mr Gary Attwood (who was and is the sole shareholder of GAHL and the chairman of its board of directors, and also a director of MEGL) became semi-retired, and Mr Woodward took over the day to day running of MEGL's business. He was appointed a director of MEGL on 27 April 2005.
7. At about the same time, Mr Attwood was approached by BDO Stoy Hayward, who said that they thought they could find a buyer for MEGL if he was interested in selling. In the course of preparations for such a sale, BDO identified Mr Woodward as a key employee; and that led in August 2005 to Mr Woodward being given an option to acquire shares in MEGL if it was taken over, sold or floated on the stock market ("the share option"). Also at this time, and again in July 2006, payments totalling £81,000 were made by MEGL to Mr Woodward. The nature of these payments ("the disputed sums") is in dispute: they are claimed in these proceedings by MEGL as loans, but said by Mr Woodward to have been bonuses. I deal with them later in this judgment.
8. Mr Woodward was himself interested in acquiring MEGL, and investigated the possibility of a management buyout. In the end, a price could not be agreed with Mr Attwood, and the proposed sale foundered.
9. A similar thing happened in late 2006 and early 2007. On this occasion, Mr Attwood was approached by Kroll to see if he was interested in selling. The person primarily dealing with the matter at Kroll was a Mr James Grenfell. Again, Mr Woodward was interested in acquiring MEGL, but this time in conjunction with a Mr Michael Donnelly. Mr Donnelly was already connected with Mr Attwood by virtue of his 51% shareholding in a US corporation called M&E Technical Services LLC ("METS"), in which Mr Attwood owned the other 49% of the shares. METS had been set up to take advantage of a requirement that the DoD place a certain amount of work with small businesses in the US. The relationship between Mr Attwood and Mr Donnelly in relation to METS was governed by an operating agreement dated 17 May 2006; but by the time of the second proposed sale Mr Woodward understood that Mr Donnelly had become disenchanted with Mr Attwood. Negotiations continued in relation to this second proposed management buyout for some eight or nine months; but in the end no price could be agreed, and the negotiations ceased.
10. In the summer of 2007 MEGL's in-house accountant retired. His replacement was Mr Gwilliam, who was engaged under a contract of employment dated 3 July 2007.
11. Towards the end of October 2007 Mr Attwood made a further attempt to sell MEGL. This time, he instructed the Birmingham office of Grant Thornton. The prospective purchasers were Mr Woodward, Mr Donnelly and Mr Gwilliam. It is common ground that a great deal of time and effort was expended by Mr Woodward and Mr Gwilliam, and also by Grant Thornton, in dealing with this proposed sale. Yet again, however, the proposed management buyout failed: in the second week of April 2008 the sale foundered as a result of Mr Attwood being unwilling to provide warranties, or accept a reduction in price, in relation to a potential tax liability in Germany.
12. The failure of this management buyout proposal caused Mr Gwilliam to hand in his notice. That was on 11 April 2008. However, he was persuaded by Mr Attwood to stay on until a replacement could be found. In the event, Mr Gwilliam did not finally leave MEGL until 11 July 2008.
13. Although Mr Woodward was, he said, "enormously deflated" by the failure of the third management buyout, he continued to work for MEGL. Following that failure, Mr Attwood brought in a firm of consultants called 9 Dots to prepare the business for sale; but by that time Mr Woodward had lost interest in attempting to acquire MEGL. Ultimately, by letter dated 20 June 2008, Mr Woodward tendered his resignation as operations director of MEGL. By letter dated 26 June 2008 MEGL accepted his resignation with effect from 20 June 2008, the requirement that he work the week's notice required by his contract of employment being expressly waived.
14. MEGL's letter of 26 June 2008 raised other matters. It asked Mr Woodward to "ensure that any other Company property in your possession (i.e. files, papers, keys, etc) is also immediately returned to the Company and that you do not retain any copies (whether in electronic, paper or any other form)"; it reminded him of his duty of confidentiality; it stated that the share option had lapsed; and it requested written proposals for repayment of the disputed sums.
15. Before Mr Woodward had responded to that letter, MEGL wrote again to him on 2 July 2008. In that letter, it was alleged that confidential information was missing and that electronic material had been deleted from the computer and Blackberry formerly used by Mr Woodward; and the letter asked Mr Woodward to say if he had any knowledge of the whereabouts of the missing confidential information and to give details of his Blackberry usage.
16. Mr Woodward replied to these letters on 3 and 4 July 2008, disputing the points made by MEGL. In the first letter, he said this:

"Regarding confidentiality about [MEGL], you have no reason to concern yourself. I have always acted with extreme professionalism and in the best interest of [MEGL] which my employment record will show. Indeed, I am extremely proud of my achievements and can confirm that there is no reason why I should pass on confidential information to a third party".

In the second letter, he said that he had at no time removed or wiped confidential information.

17. MEGL was dissatisfied with this response; and, after further investigation, it made a without notice application to Warren J for a search order in respect of both Mr Woodward and Mr Gwilliam. The application was granted, and the order was executed on 1 September 2008. Substantial numbers of documents were recovered from the premises of both Mr Woodward and Mr Gwilliam. Some of them are referred to later in this judgment (paragraph 29 onwards). Mr Woodward asserts that the search order was wrongly obtained; his application to set it aside for material non-disclosure was before me, and is also dealt with later in this judgment.
18. Mr Attwood's view of the outcome of the searches was that they had "revealed that both Mr Woodward and Mr Gwilliam had the most highly confidential MEGL contract information imaginable in their possession". That statement was made in an affidavit he swore in support of an application for an injunction ("the springboard injunction") restraining the defendants from providing technical support and/or engineering services to the DoD, NATO Maintenance Supply Agency or their contractors in competition with MEGL, from dealing with actual or prospective customers or agents of MEGL (including but not limited to Mr Donnelly and METS) on behalf of any business in competition with MEGL, and from soliciting or enticing away employees of the war independent contractors engaged by MEGL. The springboard injunction was initially granted by consent by Morgan J on 25 September 2008, and was continued until trial by Floyd J, again by consent, on 10 October 2008.
19. By orders of Kitchen J dated 4 September 2008 and Henderson J dated 11 September 2008 the trial was limited to issues of liability and injunctive relief.
20. The particulars of claim list ten substantive forms of relief which are sought. The first five claim damages, or an account of profits, for conspiracy; for breach of contract or duty of fidelity; for inducement or procurement of breaches of the agreement between Mr Attwood and Mr Donnelly (paragraph 9 above); for breach of fiduciary duty; and for misuse of confidential information. There are also claims for repayment of the disputed sums, for delivery up of MEGL's documents and damages for conversion of them; and for injunctions restraining the use or disclosure of MEGL's business information and the exploitation of the unfair competitive advantage gained by the breaches of fidelity of Mr Woodward and Mr Gwilliam.
21. With the exception of the claim relating to the disputed sums, which I deal with separately below, all these claims involve an examination of the duties owed by Mr Woodward to MEGL and an assessment of whether or not the conduct complained of by MEGL amounts to a breach of those duties.
22. I start, therefore, with a consideration of the duties owed by Mr Woodward. Although he was both a director and an employee of MEGL, it was common ground that he owed no greater duty as employee than as director; and it is therefore sufficient for me to look primarily at the duties owed by him as director. In doing so, I have regard only to the position prior to the codification of directors' duties in the Companies Act 2006, the relevant provisions of which had not yet come into force by the time Mr Woodward ceased to be a director of MEGL.
23. The most recent of the (relatively rare) occasions on which the Court of Appeal has considered this area of the law is in Foster Bryant Surveying Limited v Bryant [2007] 2 BCLC 239. In that case, the court accepted as "perceptive and useful" the following statement of the relevant principles from the judgment of Mr Livesey QC in Hunter Kane Ltd v Watkins [2002] EWHC 186 (Ch);

"1. A director, while acting as such, has a fiduciary relationship with his company. That is he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self-interest.

2. A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage either belonging to the company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.

3. A director's power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company.

4. A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined the director is in general not under the continuing obligations which are the feature of the fiduciary relationship.

5. Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily in themselves a breach of the implied term as to loyalty and fidelity.

6. Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which it is plainly in the public interest that they should be free to exploit in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the "stock in trade" of the knowledge he has acquired while the director, even including such things as business contacts and personal connections made as a result of his directorship.

7. A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation, where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.

8. In considering whether an act of a director breaches the preceding principle the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director's relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, and the factor of time in the continuation of the fiduciary duty where the alleged breach occurs after termination of the relationship of the company and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.

9. The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating to himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property. It follows that a director will not be in breach of the principle set out as point 7 above where either the company's hope of obtaining the contract was not a "maturing business opportunity" and it was not pursuing further orders or where the director's resignation was not itself prompted or influenced by a wish to acquire the business for himself.

10. As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets - although the distinction is sometimes difficult to apply in practice)."

24. I would add two matters to that list. First, it is impermissible to copy or take documents belonging to the company for the purpose of using them as an aid to competition after the relationship has ended (as with the customer lists in Robb v Green [1895] 2 QB 315). Secondly, as an incident of his fiduciary duty, a director is obliged to alert the company to any nascent threat to its business, even if he is himself part of that threat. That appears from the following passage from the judgment of Hart J in British Midland Tool Limited v Midland International Tooling Limited [2003] 2 BCLC 523 (at paragraph 89):

"A director's duty to act so as to promote the best interests of his company prima facie includes a duty to inform the company of any activity, actual or threatened, which damages those interests. The fact that the activity is contemplated by himself is, on the authority of [Balston Ltd v Headline Filters Ltd [1990] FSR 385], a circumstance which may excuse him from the latter aspect of the duty. But where the activity involves both himself and others, there is nothing in the authorities which excuses him from it. This applies, in my judgment, whether or not the activity in itself would constitute a breach by anyone of any relevant duty owed to the company. It does not, furthermore, seemed to me that the public policy of favouring competitive business activity should lead to a different conclusion. A director is free to resign his directorship at any time notwithstanding the damage that the resignation may itself cause the company....

By resigning his directorship he will put an end to his fiduciary obligations to the company so far as concerns any future activity by himself (provided that it does not involve the exploitation of confidential information or business opportunities available to him by virtue of his directorship). A director who wishes to engage in a competing business and not to disclose his intentions to the company ought, in my judgment, to resign his office as soon as his intention has been irrevocably formed and he has launched himself in the actual taking of preparatory steps."

This passage was accepted as an accurate statement of the law by Etherton J in Shepherds Investments Ltd v Walters [2007 IRLR 110 at paragraph 105; and, notwithstanding the argument of the defendants in the present case that Hart J had gone further than the law required, I too consider that the passage correctly states the law. It seems to me clear that, if a director learns that an employee is proposing to set up in competition, he is under an obligation to warn the company of that fact; and that obligation cannot be any weaker merely because he is himself involved in the proposal.

25. In the context of preparations for competition, Etherton J in the Shepherds case said this (at paragraph 108):

"What the cases show, and the parties before me agree, is that the precise point at which preparations for the establishment of a competing business by a director become unlawful will turn on the actual facts of any particular case. In each case, the touchstone for what, on the one hand, is permissible, and what, on the other hand, is impermissible unless consent is obtained from the company or employer after full disclosure, is what, in the case of a director, will be in breach of the fiduciary duties to which I have referred or, in the case of an employee, will be in breach of the obligation of fidelity. It is obvious, for example, that merely making a decision to set up a competing business at some point in the future and discussing such an idea with friends and family would not of themselves be in conflict with the best interests of the company and the employer. The consulting of lawyers and other professionals may, depending on all the circumstances, equally be consistent with a director's fiduciary duties and the employee's obligation of loyalty. At the other end of the spectrum, it is plain that soliciting customers of the company and the employer or the actual carrying on of trade by a competing business would be in breach of the duties of the director and the obligations of the employee. It is the wide range of activity and decision making between the two ends of the spectrum which will be fact sensitive in every case. In that context, Hart J may have been too prescriptive in saying, at paragraph [89] of his judgment, that the director must resign once he has irrevocably formed the intention to engage in the future in a competing business and, without disclosing his intentions to the company, takes any preparatory steps. On the facts of British Midland Tool, Hart J was plainly justified in concluding, in paragraph [90] of his judgment, that the preparatory steps had gone beyond what was consistent with the directors' fiduciary duty in circumstances where the directors were aware that a determined attempt was being made by a potential competitor to poach the company's workforce and they did nothing to discourage, and at worst actively promoted, the success of that process, whereas their duty to the company required them to take active steps to thwart the process".

26. The reference in that passage to each case being fact sensitive finds an echo in paragraph [76] of the judgment of Rix LJ in Foster Bryant Surveying Limited v Bryant, where he said this:

"The parties are content that Mr Livesey's summary of the law in Hunter Kane v Watkins ... accurately restates it. The jurisprudence which I have considered above demonstrates, I think, that the summary is perceptive and useful. For my part, however, I would find it difficult accurately to encapsulate the circumstances in which a retiring director may or may not be found to have breached his fiduciary duty. As has been frequently stated, the problem is highly fact sensitive. ... There is no doubt that the twin principles, that a director must act towards his company with honesty, good faith and loyalty and must avoid any conflict of interest, are firmly in place and are exacting requirements, exactingly enforced. Whether, however, it remains true to say, as James LJ did in Parker v McKenna (cited in Regal (Hastings) v Gulliver) that the principles are (always) "inflexible" and must be applied "inexorably" may be in doubt, at any rate in this context. Such an inflexible rule, so inexorably applied might be thought to have to carry all before it, in every circumstance. Nevertheless, the jurisprudence has shown that, while the principles remain unamended, their application in different circumstances has required care and sensitivity both to the facts and to other principles, such as that of personal freedom to compete, where that does not intrude on the misuse of the company's property whether in the form of business opportunities or trade secrets. For reasons such as these, there has been some flexibility, both in the reach and extent of the duties imposed and in the findings of liability or non-liability".

27. In the light of these authorities, I approach the claimants' complaints on the basis that Mr Woodward was entitled, as soon as he had resigned as a director on 20 June 2008, to compete against MEGL in any way he chose, and to use for that purpose the skill, knowledge and contacts that he had acquired while working for MEGL; and that the claimants can only succeed if they can establish one or more of the following: that he failed to alert MEGL to a nascent business threat; that the preparatory steps he took before resigning as director amounted to a breach of duty; that he took with him when he resigned material belonging to MEGL to assist him in competition; and that he exploited after his resignation business opportunities which are properly to be regarded as belonging to MEGL.
28. I therefore turn to the matters of which the claimants complain. In order to do so, I need to go in more detail into the chronology of events after the failure of the third projected management buyout early in April 2008.
29. It will be recalled that the failure of the buyout caused Mr Gwilliam to give in his notice, although in fact he continued to work for MEGL for three months thereafter. The first indication that he was considering the establishment of a competing business is an e-mail dated 6 May 2008 from him to Mr Woodward, which had two attachments: a document, whose file name was "Initiation meeting notes", which was an agenda for a meeting to be held on the same day; and a financial projection called "Newco forecast". The document envisaged the incorporation of a UK operating company, provisionally known as METS UK, which would be a sister company to METS, both being subsidiaries of a company described as Newco. The financial projection contained a detailed analysis of income and outgoings: income was expected to start coming in in the fourth month after start-up; and outgoings included projected salaries for both Mr Woodward and Mr Gwilliam. Although it is not clear who was expected to attend the meeting, there was in fact a meeting on 6 May 2008 between Mr Woodward, Mr Gwilliam and representatives of a concern called Orbis (which was in some way connected with Kroll, and which had access to the funds that would be required to establish the business). In an e-mail sent to Mr Gwilliam on the following day, a Mr Arrowsmith of Orbis spoke of "to this exciting opportunity", and said that "this type of business has always interested us primarily due to its niche nature, scalability and low fixed cost base - in the right hands the potential is huge". Mr Woodward gave evidence that this meeting was the result of a chance encounter with Mr Grenfell of Orbis, who had acted in relation to the second projected management buyout of MEGL; but I am unable to accept that explanation. It seems to me clear, from the absence of any explanatory material in the e-mail of 6 May 2008, that Mr Gwilliam was pursuing a course of action agreed between him and Mr Woodward, and that the meeting with a potential funder was an intended and a necessary step in the process.
30. Mr Arrowsmith's e-mail had indicated that he was available for a meeting during the following week. It is not clear if any such meeting took place.
31. On 21 May 2008 Mr Woodward sent an e-mail to Mr Gwilliam and Mr Donnelly asking them to "add any thoughts to the list of questions". The list of questions was attached as a document headed ME Technical Services UK (METS UK), and was in the following form:

"1. Company set-up. Small business, Limited Liability, Tax advantages on set-up.

2. METS UK has a separate company with a holding company above both or a UK subsidiary of METS USA.

3. Shareholder/Stakeholder in METS. Preference shares, or A - B shares. a. How many shares do we put aside for key personnel/Non ex's.

4. Outside investment, or internal investment from METS USA.

a. What do we offer for external investment?

b. Can METS USA support METS UK, if so for how long?

5. Which Banks do we approach? Can we receive invoice financing if we are a US subsidiary?

6. Please add any other questions we need to consider."

In their evidence, none of Mr Woodward, Mr Gwilliam and Mr Donnelly told me what had followed on from this document. It nevertheless seems to me clear that it evidences a further stage in a plan, in which all three of them were by now involved, to establish a company in the UK that would be a direct competitor of MEGL.

32. On 2 June 2008 Mr Gwilliam send an e-mail to Mr Donnelly, and copied it to Mr Woodward. The text was expressly addressed to "both", and so far as relevant it was in the following terms:

"I have attached a draft timetable of action points. Please could you review and add/delete/amend as you feel necessary. I appreciate this may seem a bit over the top given there is only three of us involved but it should help us ensure we are all working to similar expectations and keep the mind focused on what needs to be completed to make this all happen.

I have also attached latest draft business plan and will follow up with a separate e-mail with three years of contribution calculation workings for completion. Gordon - as we discussed earlier we need to complete the contribution spreadsheets with contract forecasts in order to produce a next draft plan. At this stage I can produce a set of assumptions and we can sit down and review what the plan says and what it means (probably before this weekend).

The word document is a first draft of some narrative to go with a business plan. We will need this for the banks in order to obtain a BACS facility and invoice financing even if we can raise the start-up finance without a sponsor.

I have also attached the updated issues log with items highlighted which have been updated."

The attached business plan is a document entitled "Business Start-Up Proposal". It describes the "business idea" as acting as a subcontractor to businesses who are prime contractors to the DoD in the supply of DoD support staff; it refers to the business model as a proven success and refers to the business that Mr Woodward and Mr Gwilliam were leaving as operating profitably in the same market. There is a reference to the third failed management buyout. Under the heading "Target market", it is said that "the customer base is all prime contractors to the US DoD"; and the section concludes:

"Some customers are aware of the setting up of METS (UK) and have shown a very keen interest in utilising their services" (emphasis added).

Under the heading "Income streams", the following appears:

"Revenue has been calculated in the business plan on a contract by contract basis. All of these contracts have been discussed in principle with the customer. No "new business" has been included in the business plan" (emphasis again added).

The importance of these statements is obvious. If they are to be regarded as statements of fact that were true at the date of the document, it is clear evidence of solicitation of MEGL's customers. I will return to this topic shortly.

33. Mr Gwilliam's e-mail of 2 June 2008 is, so far as the evidence goes, the last document relating to the establishment of a new business to come into existence prior to Mr Woodward's resignation on 20 June 2008. After that, he was on the face of it a free agent, entitled to compete against MEGL as he chose. Mr Gwilliam of course remained in MEGL's employment for another three weeks or so, and was himself therefore under a continuing obligation of fidelity to MEGL; but any liability of Mr Woodward after his own resignation would be on the basis that he participated in Mr Gwilliam's breaches of duty, not on the basis that he owed a continuing duty to MEGL. In fact, all that Mr Gwilliam can be seen to have been doing in the period between Mr Woodward's resignation and his own departure was to arrange a conference call and make an inquiry about incorporation of the new company. Those matters do not seem to me to be so significant as to be capable of giving rise to a liability in Mr Woodward if none previously existed as a result of his own activities while still a director.
34. Before I consider what view I should take of these matters, I should remark that in the period between the 6 May 2008 and his resignation on 20 June 2008, Mr Woodward continued to carry out his functions on behalf of MEGL. In particular, on 6 May 2008 he sent out a quotation for a prospective contract in Kuwait; and on the same day and the following day he sent out quotations for prospective contracts in Germany. On 19 May 2008 he generated a schedule of MEGL's costs in respect of a contract known as the 2 SCR Reset contract. On 26 May 2008 he generated a table of costs for a contract described as 2 SCR Deslat Nov 08. Copies of all these documents, which plainly contain confidential information, were recovered from Mr Woodward's home when the search order was executed. Although Mr Taylor, who took over Mr Woodward's job, told me that he had had to rebid for one contract because Mr Woodward had made a mistake in the figures, neither he nor Mr Atwood suggested that Mr Woodward had deliberately framed MEGL's bids in such a way as to make it less likely that MEGL would get the contracts.
35. In my view, the preparatory steps taken by Mr Gwilliam, in the full knowledge of Mr Woodward, constituted sufficient of a threat to the business of MEGL to require Mr Woodward, in fulfilment of his fiduciary duty as director, to alert MEGL to what was going on. At a minimum, he was aware that a senior employee was taking concerted steps, in conjunction with Mr Donnelly (who represented MEGL's link in the USA), to put in place a structure which would enable effective competition to be conducted as soon as Mr Gwilliam chose to give up his employment. It is irrelevant whether or not what Mr Gwilliam was doing was a breach of his duty of fidelity as an employee (although, for reasons similar to those given in relation to Mr Woodward in paragraphs 36 and 37 below, I think it was). As I have said, the fact that Mr Woodward was himself involved in the plan does not absolve him of his own duty to warn MEGL of the nascent commercial threat. He did not give that warning, and in my judgment was in breach of his duty in failing to do so.
36. I also consider that Mr Woodward's participation in the plans constituted a further breach of his duty. Were it not for the statements in the Business Start-Up Proposal (paragraph 32 above), I would regard his activities as on the borderline between what was acceptable and what was not. Apart from those statements, the plans had not gone beyond the stage of making preparations which were in themselves innocuous. In principle, I do not think that discussions about future competition, the investigation of potential funding, and the preparation of business plans necessarily lead to the conclusion that a director has put himself in a position where his interests conflict with his duties to his company; and, in the present case, the evidence that Mr Woodward continued to carry out his functions on behalf of MEGL satisfactorily would have led me to the conclusion that, on balance, he had not broken his duty. However, it seems to me that the statements in the Business Start-Up Proposal - to the effect that the possibility of contracts for the new company had already been discussed with the customers - reflected something that had actually happened by 2 June 2008. The only customers referred to in the document are those who were already customers of MEGL; and an approach to them on his own behalf by Mr Woodward (and he is the only possible candidate for the person who made that approach, at least in the large majority of cases, because of his regular contact with MEGL's customers, and because Mr Gwilliam's and Mr Donnelly's access to those customers will have been limited) will have constituted the plainest possible breach of his duty.
37. My finding that the statements in the Business Start-Up Proposal were true at the date of that document is based upon my assessment of the credibility of Mr Woodward and Mr Gwilliam, both specifically in relation to that document and more generally. So far as the document itself is concerned, Mr Gwilliam's initial evidence (paragraph 95 of his witness statement dated 16 January 2008) was that "in late June 2008, after Mr Woodward had left MEGL, I drafted outline business plans in order to give Mr Woodward a structure to work within and he added many of the words and reviewed the numbers giving me various amendments to make in July". This was consistent with Mr Woodward's evidence that he had taken no steps to set up a business of his own until after he resigned (paragraph 30 of his witness statement dated 15 September 2008). However, once it became apparent that a version of the business plan had come into existence on 2 June 2008, long before Mr Woodward resigned, Mr Gwilliam's position became that the statements were not then true, but would become so at some time in the future when the document was relied on for the purpose of obtaining funding. I find that explanation incredible. The first meeting with a potential funder had been held on 6 May 2008, and the document was part of a continuing process to obtain finance for the new venture. It is clear, from the order of events set out in the action points timetable that accompanied the document as an attachment to Mr Gwilliam's e-mail of 2 June 2008, that it was expected that funding would be in place by the time Mr Woodward and Mr Gwilliam left MEGL. That could only occur as a result of use of the Business Start-Up Proposal; and Mr Gwilliam was adamant in cross-examination that he would not knowingly put forward a false statement to a bank. Mr Woodward also was obliged to accept that he would have received the document while still a director of MEGL; but his evidence in cross-examination was that he had no idea how the statements came to be in the document, that he did not remonstrate with Mr Gwilliam about their inclusion, and that he had in fact had no discussions with customers until after he left MEGL. Again, I cannot accept that evidence. The Business Start-Up Proposal was an important element in the plan, in which Mr Woodward was a full participant, to set up a competing business; and Mr Gwilliam's e-mail had asked for comments on what he described as a first draft. I think it unlikely in the extreme that Mr Woodward would have failed to read the document with close attention, and that he would not have objected to what Mr Gwilliam had said if it had been untrue.
38. Mr Woodward's attempt to distance himself from the Business Start-Up Proposal is part of a more general question relating to his credibility. In paragraphs 74 and 75 of his witness statement dated 15 January 2009, Mr Woodward discusses the business plan in terms which make it clear that the primary responsibility for its contents was his. In particular, he gives as the reason why Mr Gwilliam is described in the document as the finance director his (Mr Woodward's) uncertainty as to whether he would be able to persuade Mr Gwilliam to do the job. However, the oral evidence that Mr Woodward and Mr Gwilliam gave was to the effect that the entire plan, and the large majority of documents supporting it, were the product of an unprompted idea of Mr Gwilliam's own in which Mr Woodward showed very little interest until after he had resigned as a director. It is impossible not to draw the conclusion that this change of tack is attributable to the fact that, as a result of the last- minute compromise of proceedings between the claimants and Mr Gwilliam, Mr Woodward and Mr Gwilliam realised that Mr Gwilliam could safely be blamed for anything untoward that had occurred. One point in particular made it impossible for me to believe that version of where responsibility lay. Two of the documents generated before Mr Woodward resigned - his e-mail of 21 May 2008 and the action points timetable attached to Mr Gwilliam's e- mail of 2 June 2008 - referred to shareholdings, the latter stating "MD/GW/SG to agree on proposed ultimate shareholding proportions and other potential equity holders". Notwithstanding this, and subsequent references to shareholdings, both Mr Woodward and Mr Gwilliam were adamant that the question of shareholdings had not been discussed between them and that it was doubtful whether or not Mr Gwilliam would in fact have any shares. This suggestion, that in effect Mr Gwilliam was working on a proposal that might or might not be acceptable to Mr Woodward, and in which Mr Gwilliam might himself participate without any clear hope of having any interest in the business, seems to me alien to the tenor of the documents and the characters of Mr Woodward and Mr Gwilliam as demonstrated in the witness box. In more general terms still, I accept the suggestion of the claimants' counsel that the general approach to giving evidence adopted by both Mr Woodward and Mr Gwilliam was to volunteer nothing that was not already demonstrable from the documents. An example, to which I have referred in paragraph 31 above, is the inability - or, as I perceive it to be, unwillingness - of Mr Woodward and Mr Gwilliam (and also of Mr Donnelly) to say what followed on from Mr Woodward's e-mail of 21 May 2008. This unforthcoming attitude left me with a strong impression that they were not being frank with the court.
39. I now turn to the question of the documents recovered from the premises of both Mr Woodward and Mr Gwilliam when the search order was executed. Some particularly confidential documents - in particular a copy of a report by Grant Thornton, and an electronic spreadsheet containing financial details relating to MEGL's personnel - were found at Mr Gwilliam's premises. In the light of the compromise of these proceedings against him, I do not need to determine how or why he came by those documents; nor do I consider it necessary to decide whether or not Mr Woodward knew that Mr Gwilliam had them. I have already mentioned (paragraph 34 above) some of the documents recovered from Mr Woodward's premises. There were many others, including business cards from MEGL's customers and documents containing financial information. There is no question that Mr Woodward originally came by the documents legitimately, in the course of his employment by MEGL. His explanation of how he came still to have them after his resignation was that he had moved them from the house he ordinarily lived in during the week near MEGL's premises to his family home in Formby on the sale of the former; that he regarded them as of no utility or importance, still less as being confidential; and that, since he understood MEGL's request for return of documents at the time of his resignation as referring only to confidential documents, he did not think that they needed to be returned. In the light of the clear terms of MEGL's letter of 26 June 2008, I cannot accept that explanation. Nor can I accept Mr Woodward's claim that he intended to make no use of the information contained in the documents he retained. He said that he had an intimate knowledge of MEGL's business, and in particular of the rates to use in constructing its quotations and of the people to contact in its customers. Despite his failure in cross-examination to remember accurately the e-mail address of a key contact, I accept that he knew a great deal about MEGL's business. I do not, however, accept the conclusion he sought to draw from that, namely that he had no need of the information contained in the documents. I consider that the ability to refer to the financial information contained in some of the documents that he retained, and the ready availability of names, telephone numbers and addresses of key contacts, would have saved him a lot of time and effort and provided him with a significant competitive advantage. In my judgment, his aim in retaining the documents was to assist him in competing against MEGL.
40. The claimants' final complaint was that Mr Woodward had taken for his own benefit business opportunities which properly belonged to MEGL. Alone of their complaints about Mr Woodward's conduct, I do not accept this one. With one possible exception, the evidence shows that MEGL was able to quote for all contract opportunities that arose before Mr Woodward's resignation. It is true that, as a result of his employment by MEGL, Mr Woodward was in a position to know of other contract opportunities due to arise in the immediate future, and to know how best to go about securing them for LTSL after his resignation; but in that respect he was in no better position than MEGL itself. I do not see that he can be accused of having taken for himself opportunities which in reality belonged to MEGL. The one possible exception relates to a company called AECOM, with which LTSL entered into a Subcontract Teaming Agreement on 29 August 2008. AECOM was a company with whom Mr Donnelly had some influence (although he was at pains to make clear that he could do no more than effect an introduction); and it might be thought that his influence could have been used on behalf of MEGL prior to Mr Woodward's resignation. However, Mr Woodward's evidence was that he had tried to do business with AECOM before he resigned; and, having regard to the fact that Mr Woodward was continuing to promote MEGL's interests by submitting quotations until he left the company, I am prepared to accept that evidence notwithstanding my general attitude to Mr Woodward's credibility. Moreover, it is clear that the failure of the projected management buyouts had caused Mr Donnelly to become unhappy with Mr Attwood; and I think it unlikely that Mr Donnelly would have been prepared to exercise his influence on MEGL's behalf even if asked to do so.
41. The position so far reached is accordingly that Mr Woodward was in breach of the duty he owed to MEGL as a director of it by failing to alert it to the impending threat of competition from himself and Mr Gwilliam, by taking preparatory steps which included an approach to MEGL's customers, and by retaining after his departure with a view to using them in competition documents that belonged to MEGL and contained information that was confidential to MEGL or otherwise of business utility. Although I have paid little separate attention above to Mr Woodward's position as an employee of MEGL, his seniority within that company means that the second and third of his breaches of duty at least also amount to breaches of his contract of employment. Thus it seems to me that the claimants have established their complaints of breach of fiduciary duty, breach of contract, and conspiracy (by virtue of the fact that Mr Woodward and Mr Gwilliam were acting in combination to damage MEGL by breaking their contracts of employment and, in Mr Woodward's case, his fiduciary duty as director).
42. The relief sought by the claimants, in the light of the fact that the trial was as to liability only, is an order for assessment of damages, and that I grant. They also seek a continuation of the springboard injunction, and in principle I am prepared to grant that too. However, the claimants' case was that the injunction should continue until December 2010 in order to provide MEGL with proper protection against Mr Woodward's activities. That seems to me far too long a period: indeed, I very much doubt whether so long a period would have been upheld if contained in a contractual restraint covenant. I heard some evidence, which I found inconclusive, about how long it would take to start a competing business from scratch. Taking what I can from that evidence, however, and having regard to the fact that Mr Woodward would (but for his breaches of duty) have been entitled to deploy his skill and experience to their fullest extent in competition with MEGL, I consider that the appropriate period is one year from his resignation. The springboard injunction will accordingly continue, in the modified form sought by the claimants, until 20 June 2009.
43. I now turn to deal with the disputed sums. The claimants' case rests on the fact that the disputed sums are shown as loans due from Mr Woodward in the accounts of MEGL to which he subscribed as director. However, the factual position that emerged in evidence was this. According to Mr Woodward the first payment, of £57,000, was made in response to the suggestion made by BDO Stoy Hayward that Mr Attwood should incentivise him. He said that Mr Attwood had asked how much was outstanding on his mortgage, and had given him the outstanding amount as a bonus. The second payment represented half the amount of the deposit payable in respect of the house Mr Woodward was buying near MEGL's premises, and was again paid as a bonus. It appears from a letter written on 19 September 2008 by Mr Gwilliam's predecessor as MEGL's accountant that Mr Attwood had asked him to make the first payment as a "dividend payment"; but because Mr Woodward was not a shareholder, and because Mr Attwood did not want MEGL to have to pay tax on the sum, "it was decided to put the amount in the accounts as a loan sum and sort it out later". Asked about the matter in cross- examination, Mr Attwood accepted that, even if the disputed sums were to be regarded as loans, they were not to be repaid until the share option was exercised. In these circumstances, it seems to me clear that the first payment at least, and by extension the second also, were never truly intended to be repayable by Mr Woodward. They appeared in the accounts as loans for administrative convenience only; and even on that basis they were intended to be repayable in an event which cannot now happen. For these reasons, I reject the claim to repayment of the disputed sums.
44. I turn finally to the defendants' application to set aside the search order for material non-disclosure. In the light of my findings on liability generally, it may be thought that this topic is of little relevance. Nevertheless, the application was persisted in, and I must deal with it. The allegations of nondisclosure fall into three categories. First, it is said that the failure to mention any of the three failed management buyouts was material because it suggested a reason why Mr Woodward and Mr Gwilliam might have resigned and a reason why, after their resignation, they might legitimately have retained MEGL's documents. Secondly, it is complained that the material supporting the search order failed to provide a balanced and fair account of the circumstances in which Mr Woodward resigned; and in particular (a) that it gave a false impression by stating that Mr Woodward's company car had been "recovered", when in fact he had returned it voluntarily (b) that it failed to highlight an offer of cooperation in relation to confidential information made by Mr Woodward in his response to MEGL's letters, and (c) that it failed to state that Mr Woodward's notice period had been waived, giving the impression that he had embarked on competitive activity while still in MEGL's employment. Thirdly, it is said in relation to the cross undertaking in damages that there was a failure to disclose the potential impact on MEGL's finances of an investigation into its tax position relating to its activities in Germany.
45. I have approached this matter by attempting to put myself in the position of a judge being asked to grant a search order in this case, and considering whether - had I known the matters mentioned in paragraph 44 above -1 would have withheld the order. Doing that, it seems to me that there was ample material to justify the making of the order; and that the additional material would have had no real impact on the decision. I therefore decline to set aside the order.