Don't communicate company contacts

Directors and officers are liable for distributing company secrets and information.

Their duties to exercise reasonable care and to act in the bests interests of the company may extend beyond their period as directors and officers for a reasonable period once they leave. Certainly directors and officers are not expected to divulge information about the company to competitors. An interesting case before Santow J in the New South Wales Supreme Court illustrates the range of issues that can arise in cases of this kind. The decision is Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd ((2001) 19 ACLC 299). The facts are taken from the CCH headnote.

Forkserve Pty Ltd was incorporated in 1981 with RJ and SJ as the company's sole shareholders and directors. Forkserve acted as trustee of a trading trust which operated a business of servicing and repairing forklift trucks.

L, the son and step-son respectively of RJ and SJ, was employed by Forkserve in 1983 as a mechanical apprentice and later as Service Manager. As Service Manager, L was:

• concerned with the management of staff;

• involved in the pricing and general management side of the forklift repair business;

• not authorised to enter into financial arrangements on behalf of Forkserve; and

• required to account to RJ and SJ on a monthly basis.

Following a breakdown in the relationship between L and his parents, L left Forkserve in December 1997 and started his own business and company, Aussie Forklift Repairs Pty Ltd, in competition with Forkserve.

When he left Forkserve, L took with him a telephone index book containing the names of customers and suppliers of Forkserve and a business card folder containing cards of representatives from various companies.

• The telephone index book was taken with the consent of Forkserve.

• The business card folder did not correlate with Forkserve's customer list.

• Employees of Forkserve were under no instructions to keep business cards or a telephone index book.

• The keeping of business cards or a telephone index book was not subject to a confidentiality agreement.

Two customers of Forkserve became customers of Aussie Forklift. Prior to ceasing employment with Forkserve, L sent a letter to one of these customers, APS Chemicals Pty Ltd, canvassing for business for Aussie Forklift. The letter included details of hourly rates and service fees. The other customer, Pax Australia Pty Ltd, was not canvassed prior to L ceasing employment with Forkserve. Forkserve commenced proceedings alleging that it had suffered loss and damage as a consequence of the foregoing and sought orders for an account of profits or equitable compensation. Forkserve argued that L was a director or executive officer of Forkserve, or both, such as to attract duties, obligations and liabilities under the Corporations Law and associated fiduciary duties.

• According to an ASIC company search, L was a director of Forkserve in September 1988.

• L never consented in writing to becoming a director of Forkserve.

• On a number of occasions L knowingly signed documents on behalf of Forkserve under the title of director.

Santow J held that the company information contained in the books of ASIC was prima facie evidence that L was in fact a director of Forkserve. While L could rebut that conclusion by indicating that he had never consented to become a director (either directly or indirectly), this did not necessarily dispose of the matter because he had apparently signed a number of documents of Forkserve. Santow J further held that section 60(1)(a) of the Corporations Law which identifies a director as including "a person occupying or acting in the position of director ..." was clearly relevant to determine that L was probably a director. Furthermore, L was sufficiently involved in the management of Forkserve. He was engaged in making policy and other important decisions relating to the day-to-day business of Forkserve. Indeed he acted as an executive officer of Forkserve. Having reached that conclusion Santow J felt that the evidence supported the view that there had been a solicitation of customers from a company in which one served as a director or as an employee that this amounted to a breach of duty. While an employee was entitled to canvass customers of his or her former employer once he left their employment, this might be affected by a direct stipulation to the contrary. There was no prohibition against a director of a company being a director of another company. But in such a case that director could not divulge information to the second company.

In the view of Santow J the telephone index book contained sufficient information which could be classified as a customer list. He further felt that L had misused his position by taking the business card folder to the new company and this amounted to a breach of a duty. Accordingly he made appropriate orders in relation to this breach. In addition, Santow J held that he had breached certain provisions of the Corporations Law (see now section 182 of the Corporations Law). Finally, he also held that the new company formed by L " Aussie Forklift " was equally liable for the damages and losses sustained by virtue of a tradition in the law. The judgment of Santow J merits close study by professionals because it contains a very useful review of the relevant principles and how they are to be applied in a situation of this kind.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.