Pay attention to this case if you’re employed and plan to set up a business to compete with your employer. Even without a restraint of trade clause in the employment agreement you could still come unstuck.

What happened

Holyoake is a company which supplies air-conditioning equipment. Variflow was a competitor.

The managing director and two officers of Holyoake decided to buy Variflow’s business with the aim of running it separately from Holyoake. They paid the deposit and sorted out the due diligence/structuring, then set up V-Flow Pty Limited to run the business. All this was disguised from Holyoake.

They quit shortly afterwards. V-Flow then took up Variflow’s business and went into competition with Holyoake.

What they did wrong

The Court said that the three breached their duties of loyalty and fidelity to Holyoake. The opportunity to buy Variflow did not come independently of their roles at Holyoake. Some highlights are:

  • making use of a memorandum about Variflow which they stumbled across through their employment
  • doing the due diligence/structuring/financing, and
  • marketing for new customers

while still on the job at Holyoake, all the while disguising the whole thing. It was wrong because they had clear conflicts of interest, and each put his own interests ahead of Holyoake’s.

The damage

Through V-Flow they had to pay Holyoake $1,046,923 (plus interest) which is what the Court considered to be the profits which resulted from their disloyalty and infidelity.