Directors start new company with same objects

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

13 November 2016 Is it mentioned somewhere in companies act or any other law, or is there any landmark judgement related which says that a non executive Director of a company cannot start a new company with same objects within certain time period from the date of his resignation from the previous company ? Also what is the position of his close relatives in this regard ? Can they start such a company , even when that director holds the position of director in the former company? Note that there is no employment contract with the director , neither there is any shareholder's agreement or any other agreements that abstains himself from doing so. Please let me know if u have any views or knowledge on this.

Pratik Shah

Pratik Shah (Expert)
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18 November 2016 There are no such restriction in the Companies Act.

Saket Agarwal

Saket Agarwal (Expert)
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03 December 2016 Section 166 of the Companies Act lay down the duties of the directors. It is not very difficult for a person to get trapped in the general terms used in that section. There is also a case law relating to the issue of directors starting a competing business - Rajeev Saumitra Versus Neetu SIngh and Ors (2016 (2) TMI 134 - Delhi High Court).

However the situation in this particular judgement is slightly different from your situation. In this particular case the directors were still on board and were trying to compete with the companies business.

Even then, in your case the directors would have gained access to information when they were on board and that information the director shall now use to gain advantage. Section 166(5) - "A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company".

Hence, request you to read the judgement in this case and in light of section 166 decide accordingly.

There could also be restrictions under other laws. For example, if the business is such that it had a patent applied for or registered, then obviously the director will not succeed.

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Pratik Shah

Pratik Shah (Expert)
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07 December 2016 Section 166(5) will be applicable only when the Director has taken undue advantage while he is on board. It would be very difficult to prove such undue advantage. In general sense, the Act does not restrict a Director to start a competing business, even if he is still a Director in a Company.

Expert : Anonymous

Expert : Anonymous (Expert)

07 December 2016 True. Just that it is better to be aware of the provision related to the topic and take decisions accordingly. No surprises in the future.