What you Need to Know About Restraint of Trade Clauses

What you Need to Know About Restraint of Trade Clauses

Restraint of trade clauses are often found in employment agreements and shareholder agreements. Their purpose is to protect business interests such as client information, intellectual property, employees and trade secrets. However, the extent to which a business can restrict an employee’s or a former director’s activities through such a clause is often contentious and can result in disputes.

What is a Restraint of Trade?

A restraint of trade clause in an employment contract applies when an employee leaves the organisation. Such restraint clauses can be enforced, but only to the extent that is ‘reasonably necessary’ to protect the legitimate interests of the business. Whether a provision is enforceable will therefore depend on the wording of the clause and the context of each case.

Restraint of trade clauses can be characterised as one of the following:

  • Non-competition: to prevent a former employee from competing against the company.
  • Non-solicitation: to prevent them from approaching the employer’s clients.
  • Non recruitment: to prevent the former employee from recruiting other employees from the company.
  • Confidentiality: to protect confidential information and trade secrets.

What is Reasonable Between the Parties?

If a restraint of trade clause is contentious, a court must determine what is reasonable in the context of the facts of your particular case. If the restraint clause goes beyond protecting the business’ legitimate interests to the former employee’s detriment, then a court will not enforce the clause. However, if the clause is reasonable to both parties, it is likely to be enforced.

What will a Court Consider when resolving a dispute?

In NSW, the Restraints of Trade Act 1976 governs the law surrounding restraints of trade. A court will consider a variety of factors in its determination of whether the restraint of trade clause is reasonable. Some of these factors include the:

  • Negotiation and whether parties were able to negotiate any terms.
  • Respective bargaining position of parties and whether parties were able to obtain legal advice.
  • Nature of the business and the characteristics of the role of the employee.
  • Remuneration and compensation for the restraint of trade.
  • Duration and geographical area of the restraint.

If you are an employer, what can you do to protect your business?

To ensure that your business interests are protected in the event that one of your employees leave, it is vital that the restraint of trade clauses are effective and enforceable. Employment contracts should be reviewed regularly to ensure the changing nature of the employee’s current role and the changing nature of the business. The time period of the restraint, as well as the geographical area, must be reasonable to commensurate with the employee’s position. The clauses must be drafted properly and carefully so that, in the event that certain parts of the clause are found to be unenforceable, then the clause could be severed and the employer can rely on the balance of the clause when enforcing the restraint of trade. If you believe that your employment agreement does not adequately cover your legitimate business interests, you should seek legal advice from a competent employment lawyer.

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An employer can only enforce a restraint of trade clause to the extent that it is reasonably necessary to protect their business interests. However, whether a clause is reasonably necessary will depend on the particular facts of the case, and in any dispute, it is best to seek professional legal advice. If you would like to discuss your employment law matter with a legal professional please contact us on (02) 9963 9800 or via our contact form.

How can directors prevent insolvency?

How can directors prevent insolvency?

It is vital for a director to continually monitor and assess the solvency of their company. Failure to do so may lead to insolvency and potential bankruptcy. This article will offer guidance to directors who are uncertain of their duties in managing the solvency of their company.

What is insolvency?

A company is deemed to be insolvent if it cannot pay its debts as and when they are due.

When determining a company’s solvency, the Court will assess the commercial realty of the company’s financial status. This legal process involves various cash-flow and balance sheet tests, which measure the financial position of the company. If the tests show the company is at risk of insolvency, the director must prevent their company from incurring further debt.

What is Insolvent trading?

Under s588G Corporations Act 2001, directors must not trade if their company is insolvent or if by incurring debt the company will become insolvent. It is a director’s duty to prevent insolvent trading.

Consequences for breaching this duty include civil penalties, compensation proceedings and criminal charges. Civil penalties for insolvent trading include the disqualification from directing a company or a fiscal penalty of up to $200,000. In addition to this, ASIC may prosecute and commence compensation orders against directors wherein payments are potentially unlimited. Not only is the director personally liable and at risk of bankruptcy, criminal proceedings may be issued by ASIC for insolvent trading which may lead to fines of up to $220,000 or imprisonment for up to 5 years.

What are a director’s duties?

To prevent insolvent trading, a company director must comply with the following duties:

  1. Directors must stay informed of their company’s financial position by continually assessing the company’s solvency. By monitoring bank lending facilities, cash flow and current assets, a director may predict and prepare for eventualities of poor liquidity ratios, overdue taxes or trade creditors. This assessment and preparation of potential financial difficulties is a duty which is essential to the solvency of a director’s company.
  2. Directors should obtain professional advice on the solvency of their company. Legal and financial guidance will inform directors of the risk of insolvent trading and provide options available to address financial difficulties. Options, based on advice, may include the injection of funds from an asset sale or the implementation of a restructuring plan.
  3. Directors should act in a timely manner should they, on reasonable grounds, suspect that the company is incurring debts they will not be able to pay. In this event, appropriate action should be taken immediately on advice received from legal professionals as some solutions may take time. For example, restructures and turnarounds are very complex and may take several months to prepare and implement.

For more information regarding a director’s duty to monitor and assess the financial position of their company, please visit the ASIC website.

Seek Legal Advice

It is essential that directors are aware of the duties involved in preventing civil and criminal penalties for insolvent trading.

If you require guidance or advice regarding insolvency or if you are a creditor of an insolvent company please contact us on (02) 9963 9800 or via our contact form here.