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The Claimant was a company which provided internet connectivity to the maritime industry, particularly superyachts and other like-vessels. The First to Second Defendants were minority shareholders in the Claimant, and established the Third Company as a competing company. The Fourth Defendant was a former employee of the Claimant, who moved over to the Third Company.
The hearing before the Court of Appeal arose out of an urgent interim injunction application against the Defendants for injunctions restraining the Defendants from further breaches of restrictive covenants in a shareholders’ agreement, breaches of directors’ duties, breach of an implied notice period, due to the First and Second Defendants establishing a competing business (the Third Defendant) with the assistance of the Fourth Defendant.
While the injunctions were initially granted by Linden J along with an order for the Defendants to pay the costs of the Applicant, the injunctions were largely discharged on the return date hearing and Deputy High Court Judge Tinkler declined to direct that a speedy trial should be heard.
Accordingly, the Claimant appealed on six grounds of appeal, but importantly, that
In its own cross-appeal, the Defendants argued the judge had erred in not requiring the majority shareholders to personally fortify the cross-undertakings.
The Claimant cited the High Court’s decision in Jump Trading [2023] EWHC 1305 (KB), and the Court of Appeal’s decision on appeal in the same case – expedition of cases is important in order to hear the claim early in the lifetime of the covenant and before much direct competition with the claimant has taken place; it is not enough to argue (without evidence of specific prejudice) that the parties will suffer the usual expense and speed required of a speedy trial, particularly where the listing office has confirmed that a speedy trial can be accommodated.
The Court of Appeal at [9] agreed, “In common with many, if not most cases, to enforce covenants for a limited period by way of injunction, this case cried out for an order for speedy trial. Although the decision is often described as a discretionary one, we are entitled to interfere with it because in our unanimous view it was not reasonably open to the deputy judge to conclude that the case was not suitable for a speedy trial. The principal covenants had a 12 month duration. The prospect of there not being a trial until the second half of that period, if not towards the end of it, is potentially seriously unjust to the claimant.”
It was argued that all shareholders/ directors in the Claimant (including the First and Second Defendant) had implied contracts of employment. By reason of their seniority and importance to the Claimant, it was argued that such implied contracts of employment contained an implied term of a reasonable period of notice of termination, and such reasonable period of notice was six months.
The argument that a Court could (i) hold that there was an implied notice period in an implied contract of employment, and then (ii) grant an injunction in aid of the notice period was a novel one.
Similar arguments had been run before in the cases
This was a novel point – Gorman and Boudrais are commonly seen as garden leave cases (as neither case contained express garden leave clauses), whereas Sunrise involved an employer who refused to put its employee on garden leave, suspended its employee and did not pay its employee when said employee refused to work.
While the Court of Appeal found the dispute “interesting”, it ultimately did not need to, and did not, decide the notice period injunction.
The Defendants argued that as minority shareholders, they were always going to be held to the restrictive covenants in the shareholders’ agreement, whereas the majority shareholders who effectively had control of the Claimant would be able to waive any breach of the same; there was no mutuality of obligations. Therefore, it was argued that this was really a shareholders’ dispute in the guise of a company action and the majority shareholders should therefore be required to provide a cross-undertaking personally (in addition to the Claimant’s cross-undertaking), as derived from Jones v Jones [2003] BCC 226.
The Claimant argued in response that the fact that a company is backed by a shareholder majority does not thereby debar the same company from seeking an injunction against a former shareholder-employee by that reason alone. That is because, as Hollington on Shareholder Rights provides: “[in] general, only the company by its proper organ can bring proceedings to recover damages or secure other relief for a wrong done to the company, including a breach of any duty owed by a director to the company.” The mere fact that this was a small company did not make a company dispute into a shareholders’ one.
In oral argument before it, the Court of Appeal noted that if it accepted that it could review the DHCJ’s decision, it would be entitled to exercise fresh discretion, including a discretion to order the fortification of the undertaking by the majority shareholder. It ultimately declined to do so.
Ultimately, the Claimant won on the grounds of appeal and the Respondents’ cross-appeal was dismissed.
The Respondents were ordered to pay the majority of the Claimant’s costs, despite it being an appeal on an application for interim relief.
A copy of the judgment is available here.
Anson Cheung’s practice encompasses the full range of commercial litigation, with a particular emphasis on litigation in the GCC region, international arbitration, construction, pensions and financial services. Anson’s cases frequently involve multi-jurisdictional elements. She is a member of the Attorney General’s Junior Junior scheme.
To find out more about Anson, contact Sam Carter on +44 (0)203 989 6669.
News 2 Aug, 2023
