Opinion – potential civil suit against employee who breaches contract of employment.
The fact: possible breach of contract of employment and contravention of the Companies Act in which all directors are bound in addition to the contract of employment. There are also implied terms in all contract of employment which the employee has contravened.
It is important to verify from the contract of employment first to ensure whether they are any express provisions which prohibits company director and/or employee from engaging into business of similar of same nature during and/or after the course of employment.
Breach of employment contract and contravention of the Companies Act 1965:
(a) Failure to act in the interest of the company by directly utilizing the trade secrets and information only known to few individuals in the company and setting up a separate company of his own to manage the same nature of business as currently operated by the company. Examples are machinery parts.
(b) Obtained pecuniary advantage by his special knowledge for the whole operation of the business and name of suppliers and costing to benefit his own 2 new company.
(c) Using his position as a managing director of the company to obtain pecuniary advantage in the company and persuade other buyers to buy from the new company and/or stop buying from the company.
(d) Setting up of 2 new companies whose nature of business are directly and/or indirectly in competition to the company’s nature of business. Implied breach of contract to his contract of employment.
(e) Setting up of the 2 new companies without informing the company and/or company directors which the managing director expressly know will have a damaging effect on the company’s profit and loss and business as the nature of business of the 2 companies are very similar or the same.
(f) Concealment of the setting up of the 2 companies while maintaining his position in the company will surely have a damaging effect on the company.
(g) Receiving the company’s trade receivables from customers without informing the company of the said receipt or without depositing the money into the company’s trade account is an act amounting to thelf – (need to obtain details for the 2 major transactions which arises); and
(h) All the acts cumulatively has pointed to show that the employee being a key man in the company (holding the position as a managing director) has failed to observe his fiduciary duty to act in the best interest of the company. There has clear breach of fiduciary duty.
Important sections in the Companies Act to consider:
(a) Section 131 (1) – disclosure of interests in contracts, property, offices, etc – which states that every director has to any interest to the above shall declare such immediately.
(b) Section 131(5) – every director whose interest or duties might be in conflict with his duties as a director shall declare at a meetings of the directors and extent of conflict (the extent of conflict in this case is severe) immediately.
(c) Section 132(1) – a director shall act honestly and use reasonable diligence in the discharge of his duties of his office.
(d) Section 132(2) – a director shall not use information acquired by virtue of his position as a managing director to gain directly or indirectly an advantage for himself or for any other person or to cause detriment to the company (setting up another related company will definitely infringe this section!!).
Potential cause of actions to be taken:
(a) To terminate his employment contract via issuance of letter of termination OR to suspend his employment position and issue a letter to request for an inquiry to certain queries/suspicions on the said employee before official termination (this is to allow the employee reasonable opportunity to defend and explain any allegation made against him – such inquiries will be minute and recorded – evidence can be used in court which can be useful and to show employer has acted reasonably to ensure reasonable opportunity is given to the employee in the event the matter is brought to court (particularly industrial court)).
(b) Ordinary resolutions are sufficient for the removal of directors in a company. Section 128(1) of the Companies Act.
(c) To issue a writ of summons – for breach of employment contract and/or fraud to the company and/or theft to the company. The Employer will seek for a claim for (i) general damages for losses suffered as a result of the action by the employee in setting up new companies with same/similar nature of business without informing the company and the company may have suffered actual/potential financial losses AND/OR potential/actual losses of clients which are crucial to the continuous income of the company. The court will take consideration into the size of the company and the volume of business and will consider any deterioration of the company’s business (analyzing the company’s accounts – external economic circumstances will be discounted) to determine the potential losses. We do not need to provide DIRECT EVIDENCE to proof the loss of clientele (i.e requesting important witnesses to attend court to show that the employee persuade the client/customer to engage his own company instead of the company) but CIRCUMSTANTIAL EVIDENCE may be sufficient (i.e to show various factual situation to state that company’s P&L is effected and various client has diverted and has become his customers to purchase goods or services from him at a lower rate).
(ii) general damages for loss of reputation and loss of goodwill of the company;
(iii) injunction to retrain the employee and/or related parties to the employee (related parties will be defined accordingly) from further dealings and/or to enter into any transactions and/or set up new companies which is in direct and/or indirect competition to the company;
(iv) to obtain an injunction to retrain the employee from further utilizing the company’s trade secrets (inclusive of all customers and suppliers) for his own pecuniary advantages.
(v) return of the monies received by the employee together with interest.
However it is important to take note that the new company has not been in dealings with the company for supplies or purchase of any materials and such is a mitigating factor.
