CMS Dolphin Ltd v Simonet [2002] BCC 600

Mr Simonet, managing director of CMS Dolphin Ltd, resigned and diverted clients Argos, Reebok and DFB to his new venture with Mr Patterson. The court held he breached fiduciary duties by appropriating maturing business opportunities and was accountable for profits, even though profits were made through a corporate vehicle.

Facts

Kevin Ball and Paul Simonet formed CMS Dolphin Ltd (‘CMSD’) as an advertising agency in early 1998. Mr Simonet was managing director responsible for client work, whilst Mr Ball was to arrange financing. Throughout its existence, CMSD was underfunded and tensions grew between the two over financial controls and Mr Ball’s failure to deliver promised funding of up to £250,000.

By late 1998, Mr Simonet had approached Bill Patterson as a potential partner. In early 1999, whilst still at CMSD, Mr Simonet procured the incorporation of Dolphin (GB) Ltd, and Mr Patterson negotiated heads of terms for new premises in Golden Square on behalf of ‘Dolphin Advertising’, without Mr Ball’s knowledge. Mr Simonet secured contracts with Argos Direct (£8,000 monthly retainer for 12 months) and Delaney Fletcher Bozell (‘DFB’) (£150,000 for 12 months), and had ongoing work with Reebok.

On 16 April 1999, Mr Simonet resigned as managing director following Mr Ball’s refusal to accept his ultimatum for a ‘smooth transfer’ of certain clients to a new company. That same day, Mr Simonet and Mr Patterson rented office space from Regus. All CMSD staff subsequently left to join Mr Simonet’s new venture, initially called Millennium, later Blue (GB) Ltd. The principal clients (Argos, Reebok and DFB) transferred their business to the new venture.

Issues

Breach of Fiduciary Duty

Whether Mr Simonet, by resigning and diverting CMSD’s business and maturing business opportunities to himself and Blue, breached his fiduciary duties as a director.

Accountability for Profits through Corporate Vehicle

Whether Mr Simonet was accountable for profits made through Blue, a company he controlled with Mr Patterson.

Breach of Employment Contract

Whether Mr Simonet breached his contract of employment by resigning without notice and whether his subsequent actions breached duties of fidelity.

Judgment

Lawrence Collins J held that Mr Simonet was in breach of his fiduciary duties. The court applied and extended the principles from Regal (Hastings) Ltd v Gulliver and Canadian Aero Service Ltd v O’Malley.

“In my judgment 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 property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating for himself that property.”

The court found that Mr Simonet’s resignation was prompted by a wish to acquire for himself the business opportunities of CMSD. He had withheld information about the Argos and DFB contracts from Mr Ball, and his twin strategy was either to force Mr Ball out or to set up separately with the same clients.

“Mr Simonet cannot escape the consequences of his own breach of fiduciary duty by transferring the fruits of that breach to a company. He remains the person principally liable.”

The court held that using a corporate vehicle did not insulate Mr Simonet from liability, following Cook v Deeks and Imperial Mercantile Credit Assn v Coleman.

On the employment contract claim, the court found Mr Simonet had breached his contract by resigning without the three months’ reasonable notice required, and that his duties of fidelity continued. His recruitment of staff and solicitation of customers were breaches of those duties.

CMSD was entitled to an account of profits from Mr Simonet for the Argos, Reebok and DFB work for 1999, plus £12,500 for the lost Debenhams Vision Day fee, direct costs of providing substitute services, and £20,000 for the loss of chance of winning the Debenhams brand building contract. Mr Simonet was entitled on his counterclaim to unpaid salary and £1,760 in reimbursements.

Implications

This case significantly clarifies the liability of directors who resign to exploit business opportunities developed whilst in office. It confirms that:

• A director is disqualified from usurping maturing business opportunities even after resignation where the resignation was prompted by a wish to acquire those opportunities.
• A director cannot escape accountability by channelling profits through a partnership or company under his control.
• The duty of fidelity under an employment contract continues where the employee has wrongfully terminated without notice.
• An account of profits is available against a fiduciary who appropriates company property, even where the company had only a limited chance of securing the opportunity itself.

The judgment provides important guidance on the boundary between legitimate competition by former directors and breach of fiduciary duty, emphasising that directors must not appropriate for themselves business opportunities being actively pursued by their company.

Verdict: Judgment for CMS Dolphin Ltd. Mr Simonet was held liable for breach of fiduciary duty and breach of his contract of employment. He was required to account for profits from the diverted business with Argos, Reebok and DFB for 1999. CMSD was also awarded £12,500 for the lost Debenhams Vision Day fee, direct costs of substitute services, and £20,000 for loss of chance of the Debenhams brand building contract. Mr Simonet succeeded on his counterclaim for unpaid salary and £1,760 in reimbursements.

Source: CMS Dolphin Ltd v Simonet [2002] BCC 600