Can A Director Leave And Start A Competing Business?

Can a director leave and start a competing business? Sometimes, yes. A director isn't automatically banned from working in the same industry forever.

But there are some big catches. If the director is still on the board, has confidential information, owns shares, has signed a service agreement or is bound by restrictive covenants, the position can change very quickly.

This is one of those situations where timing and paperwork matter. The same plan can be perfectly workable if handled openly, or risky if it involves hidden customer approaches, copied files or a conflict that was never declared.

Let's look at what a company or departing director should check before anyone joins or starts a competitor.

Can A Director Start A Competing Business In The UK?

Yes, a director can often start a competing business in the UK after they leave, but they must not breach their director duties, misuse confidential information or ignore any restrictions they've agreed to.

A company director has statutory duties under the Companies Act 2006. While they're in office, those duties sit alongside any obligations in their director service agreement, employment contract, shareholders agreement, articles of association and confidentiality agreements.

The biggest practical issue is usually this: was the competing business planned while the director was still meant to be acting in the company's best interests?

For example, if a director quietly sets up a new company, pitches to your key customers and diverts a deal that belonged to your business, that's very different from resigning properly and later building something new without using your information or opportunities.

As a starting point, you should check:

• The director's role: Are they an executive director involved day to day, or a non-executive director with limited access?
• What they knew: Did they have access to pricing, customer lists, product roadmaps, supplier terms or trade secrets?
• What they signed: Is there a director service agreement, employment contract, shareholders agreement or deed of confidentiality?
• What they did before leaving: Did they disclose the conflict, get board approval or keep it hidden?
• What they plan to do next: Are they simply working in the same market, or targeting the same customers, staff and opportunities?

If you're dealing with a director starting a competing business in the UK, the safest first step is to separate what they're allowed to do after leaving from what they may have done while still owing duties to the company.

What Duties Apply Before A Director Resigns?

Before a director resigns, they must keep acting in the company's interests and avoid unauthorised conflicts of interest.

The key duties are set out in the Companies Act 2006. In this context, the most relevant ones are:

• Section 171: to act within the company's constitution and use powers for proper purposes.
• Section 172: to promote the success of the company.
• Section 173: to exercise independent judgement.
• Section 174: to exercise reasonable care, skill and diligence.
• Section 175: to avoid situations where they have, or may have, a conflict of interest.
• Section 176: not to accept benefits from third parties because of their role.
• Section 177: to declare an interest in a proposed transaction or arrangement with the company.

In plain English, a director shouldn't secretly compete with the company while still sitting at the board table.

That means they should be very careful about:

• approaching company customers for the new venture
• diverting enquiries, contracts or tenders away from the company
• using company meetings or systems to develop the competing business
• encouraging staff or contractors to leave before they've resigned
• using company funds, equipment, software or data for the new venture
• hiding a conflict from the rest of the board

A conflict isn't always fatal. Depending on the company's constitution and articles of association, the board may be able to authorise certain conflicts. But that authorisation should be properly recorded, and conflicted directors may need to step out of discussions or votes.

If the company is in financial difficulty, directors also need to be especially careful. Duties can shift towards considering creditors' interests when insolvency is likely. Starting a competitor while the existing company is under pressure can create extra risk if decisions look self-interested.

What Happens After Director Resignation?

After resignation, most director duties end, but some important obligations can continue.

Section 170(2) of the Companies Act 2006 says certain duties still apply after a person stops being a director. In particular, a former director may still be restricted from exploiting property, information or opportunities they became aware of as a director, and from accepting benefits connected to things they did or didn't do while in office.

Confidentiality is also a major issue. Even without a perfect contract, the law can protect trade secrets and confidential business information. The Trade Secrets (Enforcement, etc.) Regulations 2018 may also be relevant where information has commercial value because it's secret and you've taken reasonable steps to keep it confidential.

Customer data needs extra care. If a director takes personal data from your CRM, mailing list or order history and uses it for a new venture, that can raise issues under the UK GDPR and the Data Protection Act 2018.

On the practical side, when a director leaves you should usually:

• record the resignation or removal in board minutes or a directors' resolution
• file form TM01 at Companies House within 14 days of the termination
• update the company's statutory registers
• remove bank, software, email and document access
• recover laptops, phones, keys, cards and company records
• remind the director of confidentiality, IP and post-termination restrictions

There isn't a universal statutory notice period for resigning as a director. The notice period usually comes from the articles, a service agreement or an employment contract. If the director is also an employee, the Employment Rights Act 1996 says an employee who has been employed for at least one month must give at least one week's notice, unless their contract requires more.

The cleanest exits usually happen when the resignation, share position, handover and future restrictions are all dealt with at the same time.

Can A Restrictive Covenant Stop A Director Joining A Competitor?

Yes, a restrictive covenant can stop or limit a director from joining or starting a competitor, but only if it's reasonable and protects a legitimate business interest.

Courts in England and Wales don't generally like restraints that simply stop someone earning a living. So a restriction needs to be targeted. It should go no further than needed to protect things like confidential information, customer connections, workforce stability or goodwill.

Common director restrictions include:

• Non-compete clauses: stopping the director from working for or setting up a competing business for a set period.
• Non-solicitation clauses: stopping the director from approaching certain customers, suppliers or employees.
• Non-dealing clauses: stopping the director from doing business with certain customers, even if the customer approaches first.
• Non-poaching clauses: stopping the director from recruiting your staff or contractors.
• Confidentiality clauses: stopping use or disclosure of confidential information, often with no fixed end date for trade secrets.

What counts as reasonable depends on the facts. A six-month non-solicitation clause limited to customers the director dealt with personally may be easier to justify than a two-year worldwide ban on working in the industry.

Restrictions in a shareholders agreement or business sale agreement may be treated differently from restrictions in a standard employee contract. A director who is also a shareholder, founder or seller may have had more bargaining power and may have received value for agreeing to stronger restraints.

If you're relying on a restrictive covenant, don't assume the words are enforceable just because they're in a signed contract. Check the wording, duration, geography, customer scope and the director's actual role. If you're the departing director, get advice before you build your plans around a clause being unenforceable.

What Should You Do If A Director Is Already Competing?

If you think a current or former director is already competing unfairly, act quickly but keep it measured.

Your first job is to preserve evidence and protect the business, not to fire off accusations you can't prove. A calm, documented response gives you more options.

First Steps To Take

• Secure systems: suspend or review access to email, cloud storage, CRM, accounting tools and banking platforms where appropriate.
• Preserve records: keep copies of relevant emails, messages, board papers, customer complaints, access logs and file download records.
• Check the documents: review the articles, service agreement, employment contract, shareholders agreement, IP clauses and confidentiality provisions.
• Map the timeline: work out when the competing business was incorporated, when customers were approached and when the director resigned.
• Protect customers: consider a careful customer communication plan if there's confusion in the market.
• Get advice early: urgent action may be needed if confidential information, customers or staff are being moved across.

A Real-World Example

Say Maya runs a Manchester software company that sells booking software to fitness studios. Her sales director, Tom, owns 25% of the shares and has a service agreement with three months' notice. The agreement includes a 12-month non-solicitation clause for customers he dealt with in the previous year, plus confidentiality and IP clauses.

Tom resigns on 1 June and says he plans to start a similar platform. Maya discovers that, in May, Tom downloaded a list of 180 customer contacts and emailed 12 key customers from his personal account.

In that scenario, the problem isn't just that Tom wants to compete. The bigger issues are the timing, the customer approaches, the data download and the possible breach of his director duties before resignation. Maya should preserve the download logs and emails, remove access, check the shareholders agreement for leaver provisions, file TM01 by 15 June and get tailored advice on the strongest next step.

Depending on the documents and evidence, the company might seek undertakings, delivery up or deletion of information, compensation, an account of profits or urgent court orders. If Tom's shares are covered by bad leaver provisions, the shareholders agreement may also require a transfer of his shares or affect the price he receives.

What Should A Director Exit Agreement Include?

A director exit agreement should clearly deal with the handover, shares, confidentiality, IP, restrictions and any final payments or releases.

You don't always need a separate exit agreement. Sometimes the service agreement, shareholders agreement and resignation letter already cover the key points. But where the director is senior, owns shares, has access to sensitive information or may compete, a tailored exit deed can reduce messy arguments later.

Here's a practical outline you can use as a starting point. A lawyer should tailor it before you use it, because small drafting choices can make a big difference to enforceability.

1. Parties And Background: identify the company, the departing director and the reason for the exit.
2. Resignation Date And Notice: state the last day as director, employee or consultant, and whether notice is worked or paid.
3. Handover Duties: list the tasks, customer updates, passwords, documents and introductions needed before exit.
4. Company Property: require return of devices, files, keys, cards, records, confidential documents and backups.
5. Confidentiality: confirm what information remains confidential and how it must be handled after departure.
6. Intellectual Property: confirm ownership of code, designs, materials, inventions, domain names and business assets.
7. Data Protection: require deletion or return of personal data and confirm no customer data can be used for a new venture.
8. Restrictive Covenants: restate or clarify any non-compete, non-solicit, non-deal or non-poach obligations.
9. Shares And Leaver Terms: explain whether shares are kept, sold, bought back or transferred under the shareholders agreement.
10. Final Payments: cover salary, fees, expenses, dividends, loans or settlement amounts where relevant.
11. Announcements: agree what can be said to staff, customers, suppliers and the market.
12. Dispute Resolution: set out how disagreements will be handled before anyone escalates the matter.

IP deserves special attention. If a director created branding, software, content or designs, don't assume the company owns everything automatically. Copyright created by an employee in the course of employment is usually owned by the employer under the Copyright, Designs and Patents Act 1988, but directors aren't always employees for every purpose. Clear IP assignment wording avoids doubt.

Key Takeaways

• A director can often start or join a competitor after leaving, but they can't misuse confidential information, company property or opportunities.
• While still in office, a director must comply with Companies Act 2006 duties, including avoiding conflicts and promoting the company's success.
• Restrictive covenants can be enforceable if they're reasonable, targeted and protect a legitimate business interest.
• Shareholders agreements can add powerful remedies, including good leaver and bad leaver provisions, compulsory share transfers and confidentiality obligations.
• If something has already gone wrong, preserve evidence, secure access, check the documents and get advice before taking heavy-handed action.
• A tailored exit agreement can help protect the business and give the departing director clarity on what they can and can't do next.

If you'd like help with director exits, restrictive covenants, shareholder agreement remedies or protecting your confidential information and IP, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.