Shepherds Investments Ltd & Anor v Walters & Ors

Factual and Procedural Background

The proceedings concern claims for damages, an account of profits, and other relief against the First to Sixth Defendants, who were former directors and employees of the Claimants, for breaches of duty and contract. The claims focus particularly on the establishment of a competing business, diversion of a business opportunity, and misuse of confidential information.

The First to Third Defendants were formerly directors and employees of the Claimants' companies within the Shepherds Group, which comprised an investment company and its subsidiaries involved in investing in US traded life policies (TLPs) and UK traded endowment policies (TEPs). The Fifth and Sixth Defendants are companies alleged to be carrying on the competing business.

The Shepherds Group had management and advisory agreements governing investment policy and management fees. The Individual Defendants held senior roles within the group, with written contracts imposing confidentiality and restrictions on other business activities.

In 2003, the Shepherds Group considered establishing a whole life policy investment fund. During that year, the Individual Defendants began planning and taking steps to establish a new competing business investing in whole life policies, culminating in the incorporation of the Fifth and Sixth Defendants in October 2003 and the launch of their business in early 2004.

The Claimants commenced proceedings in August 2004, alleging breaches of fiduciary duty, contractual obligations, and misuse of confidential information by the Individual Defendants and the competing companies.

Legal Issues Presented

1. Whether the Individual Defendants breached fiduciary duties and obligations of fidelity by promoting and establishing a competing business while still employed by the Claimants' companies.
2. Whether the Individual Defendants diverted a business opportunity concerning investment in whole life policies.
3. Whether the Individual Defendants and the competing companies misused confidential information belonging to the Claimants.
4. Whether the express contractual terms restricting engagement in other business were breached by the Individual Defendants.
5. The appropriate remedies and whether the Claimants suffered loss causally linked to the Defendants' conduct.

Arguments of the Parties

Claimants' Arguments

• The Individual Defendants owed fiduciary duties as directors and obligations of fidelity as employees and breached these by setting up and promoting a competing business while still employed.
• The Defendants diverted a business opportunity relating to investment in whole life policies, exploiting information and opportunities gained during their employment.
• The Defendants misused confidential information, including business models and contact lists, to advance the competing business.
• Express contractual terms prohibited the Individual Defendants from engaging in competing business without written consent, which was breached.
• The Claimants seek damages or an account of profits for losses caused by the Defendants' breaches.

Defendants' Arguments

• Mr Walters and Mr Hindle owed fiduciary duties only to one Claimant company, not others, and thus no breach occurred regarding the competing business.
• Mr Simmons did not owe fiduciary duties as he was never formally a director; only an implied duty of fidelity applied.
• The steps taken to establish the competing business were preparatory and lawful under established case law.
• The competing business was not in meaningful competition due to significant differences in investment products.
• No misuse of confidential information occurred; references to business models were general market knowledge, and no evidence supports improper use of contact lists.
• The Claimants have not proven causation of loss resulting from the Defendants’ conduct.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Canadian Aero Service Ltd v O'Malley (1973) 40 DLR (3d) 371	Senior management may owe fiduciary duties even if not formally directors.	The court held Mr Simmons was a de facto director and owed fiduciary duties based on his role and conduct.
Robb v Green [1895] 2 QB 315	Implied obligation of good faith and fidelity in employment contracts.	Confirmed the implied obligation owed by the Individual Defendants as employees.
Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244	Directors owe a fundamental duty of loyalty and must act in good faith in the best interests of the company.	Used to affirm the duty of loyalty breached by the Individual Defendants in promoting a competing business without disclosure.
British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466	Directors must disclose competing business activities; preparatory steps may breach duties if not disclosed.	Preferred over conflicting authority; held Individual Defendants breached fiduciary duties by undisclosed preparatory steps.
Balston Ltd v Headline Filters Ltd [1990] FSR 385	Preparatory steps to set up competing business may not breach fiduciary duty if no actual competition occurs.	Distinguished and not preferred; court held the facts here showed breach beyond mere preparatory steps.
CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704	Directors exploiting a maturing business opportunity post-resignation may be constructive trustees liable for profits.	Applied to hold that certain Individual Defendants were liable for profits from the competing business opportunity.
Ward Evans Financial Services Ltd v Fox [2001] EWCA Civ 1243	Employees forming competing businesses without consent breach express contractual terms.	Relied upon to support breach of express contractual term by Mr Walters.
Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180	Definition of de facto director and duties owed.	Applied to find Mr Simmons was a de facto director owing fiduciary duties.
Scottish Co-operative Wholesale Ltd v Meyer [1958] 3 All ER 66	Directors must act with complete good faith and promote company interests.	Used to describe the fundamental duties of directors breached here.
Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169	Employees owe a duty of fidelity to their employer.	Confirmed the implied obligation of fidelity breached by the Individual Defendants as employees.

Court's Reasoning and Analysis

The court began by identifying that the Individual Defendants owed fiduciary duties as directors or de facto directors and obligations of fidelity as employees. It found that Mr Simmons was a de facto director based on his conduct, holding himself out as such and undertaking director-level responsibilities.

The court applied established principles that directors must act in good faith in the best interests of the company and avoid conflicts between personal interests and company interests. It considered the conflicting authorities on whether preparatory steps to establish a competing business breach fiduciary duties.

The court preferred the reasoning in British Midland Tool over Balston, holding that undisclosed preparatory steps taken with irrevocable intention to establish a competing business, which conflicted with the companies’ interests, constituted breaches of fiduciary duty and obligations of fidelity.

It was found that by 12 August 2003, the Individual Defendants had formed an irrevocable intention to set up the competing business and took active steps to implement it while still employed, without disclosure or consent, placing them in breach.

The court rejected the Defendants’ argument that the competing business was not a real competitive threat, finding that both businesses operated in the same asset class and market, and that the Defendants knew their conduct was likely to be regarded as competitive.

Regarding misuse of confidential information, the court found no sufficient evidence that the Defendants misused confidential information or contact lists to the requisite standard of proof.

The court held that Mr Walters breached express contractual terms restricting engagement in competing business, whereas Mr Hindle did not, based on the timing and extent of their involvement.

On remedies, the court found that although breaches occurred, the Claimants failed to prove causation of loss to the requisite standard, as no evidence showed that the earlier business launch caused loss to the Claimants' business or diverted customers in a material way.

However, the court held that the Claimants were entitled to an account of profits made by the Individual Defendants from their breaches of fiduciary duty, consistent with the principle that fiduciaries must not profit from breaches of duty.

Holding and Implications

The court's final decision was as follows:

• Mr Walters and Mr Hindle breached their fiduciary duties and obligations of loyalty to the Claimant company Financial by promoting the competing business prior to resignation.
• Mr Walters breached express contractual terms prohibiting competing business activities; Mr Hindle did not breach these express terms.
• Mr Simmons breached fiduciary duties and obligations of loyalty to the Claimant company Investments by promoting the competing business prior to resignation.
• Mr Simmons and Mr Hindle breached fiduciary duties by exploiting a maturing business opportunity through resignations to establish the competing business.
• The Claimants failed to prove that any loss was caused by the Defendants’ earlier commencement of the competing business.
• The Claimants are entitled to an account of profits made by the Individual Defendants due to their breaches of duty.
• The claims based on misuse of confidential information were rejected.

The direct effect of this decision is that the Individual Defendants are held liable for breaches of fiduciary and contractual duties and must account for profits, but no damages for loss were awarded due to lack of causation evidence. No new precedent was set beyond the application and reconciliation of existing authorities.