Facing Legal Threats After Resigning to Start My Own Company – What Should I Do?

Hi All, I was working with a software development company for 5 years. I was not experiencing significant growth in my role and hence decided to resign. Before resigning, I had established a company (currently at the memorandum subscriber stage) and was contemplating leaving the company to start my own venture. It was a tough decision to make. However, before I could resign, my employer became aware of my plans. They requested that I hand over all ongoing projects and sign an agreement that would prohibit me from engaging in similar work for a period of 2 years post-employment. I declined to sign the agreement, and now my employer is threatening legal action. They claim that my establishment of a company with a similar focus demonstrates a conflict of interest, making me liable.

My own company has not yet commenced operations. Due to the threats from my employer, I decided to resign via email. I also transferred all my projects and confirmed this via email. I have not received a response to my resignation email. However, after 5-6 days, my employer issued a show cause notice regarding the situation, stating that I had been placed on leave during the investigation. The notice was also sent via registered post to my address, but as I was not at home, the mail was returned. I responded to the notice via email, refuting the allegations and clarifying that my company has not yet begun operations. I also requested that my leave days be considered as part of the notice period.

Please advise if I have erred in any way and if there are potential repercussions. My last month's salary has not been paid, and today marks one month since my resignation date.

I am aware that I may not receive a release letter. Kindly suggest the appropriate course of action.

Thank you.

In my opinion, an NDA consists of not disclosing project material or assignments for a limited period; it does not imply that you cannot work on similar tasks for 2 years. Please carefully review your NDA agreement, and I would advise seeking assistance from a reputable labor lawyer.

Regards,
Ashish

Your case is interesting. I know a bit about laws, so I have a few questions to help us understand your case:

Questions Regarding Your Situation

Q1. Please provide details of the NDA mentioned in your appointment letter.

Q2. Do you want to open your own company? Have you already registered it under the Companies Act 1956 (including amendments made during 2013), or are you planning to open a company under OPC (One Person Company), recently passed?

FYI, emails/comments made on Facebook/LinkedIn are not admissible in court. There is a specific reason behind this. It is possible for anyone to access your emails/Facebook/LinkedIn account. For emails, they may or may not be accepted in court. For private companies, emails are usually not accepted, but sometimes they are for public companies. It depends on the situation, but most of the time, they are not authorized in court.

Q3. What is the nature of the company you were working for? Firms/LLC/PVT LTD/Public (where 40% of the total capital is held by the Central Government/state Government-under certain special scenarios/its wings or RBI)?

It is crucial to ensure that what your company did is legally correct. If you have not sent your resignation via registered post and the acceptance of resignation has not taken place, the company has the right not to relieve you from your job. If they have mentioned that they are keeping you on leave, it means they are not relieving you. In any case, it cannot be considered that you are serving the notice period in this manner.

Even if your leave balance runs out, you cannot claim that you have been relieved from service until the company issues a relieving letter. I suggest contacting a civil lawyer as soon as possible.

If you do not want to do so immediately, then write a simple letter stating, "Sir, I want to resign from my job for the following reasons. I have submitted all project documents on such and such a date. Please provide your employment ID, date of joining. For any clarification, please contact me at the provided email/phone number/address. I would be grateful if you kindly accept this. Regards, Your Name."

Do not include any other details in the letter, such as wrong allegations, etc. If you wish, you can attach a copy of your appointment letter. I hope your lawyer will advise the same in the early stages. Wait for their reply and try to communicate over letters. If the company wishes to take legal action, only the court will decide the outcome. If they accept your resignation, that's great. Otherwise, you have no option but to consult a lawyer.

Thank you and regards.

Hi Sovik, today I received a letter of termination from my company. I am really saddened by this news after dedicating 4 years of service to the company. I am unsure if I have done anything wrong. I had dreams of starting my own company and even initiated the process, although I have not taken on any projects yet. The trade license has not been applied for as well.

Although I had planned to start my own company regardless, I still desire a clean release and am also awaiting the salary for the month of March.

Response to Your Queries

Yes, the company was registered last December, but it is not operational yet. As mentioned earlier, the trade license has not been applied for. My role in the company is listed as a Non-Executive Director. I was indecisive about taking the risk and starting my own venture. Additionally, existing project commitments made me consider staying on for another 2-3 months to solidify my plans.

My company, a private limited company, focused on software development, aligning with my professional expertise.

Interestingly, the termination letter states that I had not been in the office since the 28th of March. However, the show-cause notice indicated that the company had asked me to hand over responsibilities and proceed on leave until further actions were decided.

I have attached the show-cause notice, my reply to the notice, a section of my appointment letter, and the termination letter.

I look forward to your valuable suggestions.

Regards,

There are a few things I would like to highlight. It would have two parts - from a management perspective and a legal perspective.

Management Perspective:

• If you have registered a company and wish to go for business, I would suggest going for it.

• If you want to go for business, just forget what happened. In business, we try to avoid court/trial as much as possible. It's time-consuming and money-consuming.

• If you go for business, then this termination is useless. As the termination itself has become illegal. Later, if you wish to go for service, you have to carry all these documents and need to explain to HR about it in detail. You need to clarify it in such a manner so that there are no misunderstandings.

I would suggest, there is no need to think you won't be successful in business. Go for it, be positive, and all the best. Now, being an MBA in HR and Finance, as well as a student of CS, possessing experience in end-to-end business management, I would only say, you are lucky. The seniors of the company where you were working made some errors. If I were in the position of HR HEAD of your ex-company, I might have tackled the situation differently, a little more maturely, and without keeping so many legal loops on the company's end.

Errors Made by Your Ex-Company (Maximum on Legal Grounds):

1. This 'termination of service' is invalid since the official show cause letter was issued by them on April 3, 2014. It was sent by registry, so for delivery, at least one day would be required. Issuance of a show cause letter means the company is asking the employee to provide a legitimate cause and explanation against the charges brought on the employee. So, a certain time period is associated. By any means, 'Termination of Service' is legally not acceptable when the 'Show cause letter' has been issued on the date from which the company is claiming termination of service has become effective. How can a company ask for an explanation from an employee whose service has already been terminated?

2. Second, as per the NDA of the appointment letter, the employee shall obey the NDA clause. Opening a private company never certifies or proves under any circumstances that a violation of NDA has taken place. Yes, I agree that the interest of the ex-company and its confidentiality/trade secrets may be hampered. Preventive measures can be taken, but not actions. It's like threatening someone with committing a murder. By no means can the police arrest that person on the ground of murder. Yes, the police can take preventative measures or investigate.

Hope you now understand why the show cause is important from the company's end. As per the law, the procedure is to first issue a show cause - then if the employee's reply is not satisfactory, the termination process may be initiated. Always the official date will be after the date of receiving.

Now, understand something clearly, by suggesting the solution, I know I'll make many HRs my No.1 enemy. Still, we have to go with whatever is legally correct and not morally. (PLEASE DO THIS IF YOU ARE WILLING TO CHALLENGE THE COMPANY AND MAY REQUIRE A LEGAL FIGHT IF THE COMPANY IS ADAMANT - I AM NEUTRAL)

1. Send a resignation letter via registered post. Write:

Respected Sir,

I received a termination letter on so and so date. Anyway, I have received your Show Cause letter too, stating I have violated so and so. Sir, opening a company and becoming a director, by no means signify that I have violated the NDA clause of my appointment letter. But still, with due request, if possible kindly show a genuine cause and explain how I violated the NDA policy with any specific attempt from my end (i.e., Violation of Copyright Act, Information Technology Act, etc., which you are claiming)?

Secondly, please clarify how can you/company ask for a legitimate cause against the charges on me when you all are declaring that my service has been terminated from April 3, 2014, onwards and the letter of Show Cause was issued by you all on April 3, 2014? This is confusing and contradictory, as per the law I understand, as it means the decision of termination was taken before listening to any explanation from my end.

Please clarify with sufficient reason why my salary of March is pending? And by when (ETA) it will be credited to my account? As per the Show cause letter, I was on leave provided by the company.

I agree that opening a company or working as a Director may be against the interest of the Company and so I have already resigned on April 29, 2014, via e-mail. Still, I am confirming that, in order to safeguard the mutual interest of both, 'I HAVE RESIGNED FROM THE SERVICES'. I do respect the right of the company to terminate me, but the ground of termination is not clear, as the company which is not in operation, how can it be considered as a competitor of your business. The reason being, I have resigned earlier before this Termination letter was issued. The acceptance of resignation is in your hand.

Please reply as early as possible - maximum 7 business days. Else, I would consider the letter of termination null and void, as per law and you all have accepted my resignation.

Regards

Your name.

Wait for a reply, then as per reply, you need to work. You may need to consult a lawyer. The choice is yours. You have to decide whether you wish to fight or not. But yes, if I were in your place, I might have taken legal action if the company provides a negative reply post this e-mail, that's because to save my new baby (a new business). But since I am unaware of your financial position, your priorities, and needs, I have suggested not to go for a legal battle if you are looking to move for business because you need money and time there - new baby.

Thanks and Regards,

Sovik B

The matter is neither silly nor without reason. The HR department or the legal team has made some technical errors. Earlier, when a show-cause notice was issued by management, they were on the right track.

Three Important Questions Arise

1. **Breach of Law in Question:** Copyright Act, Information Technology Act, etc. Possessing information/materials does not necessarily mean misuse has occurred. Therefore, the opening of a company under the Companies Act 1956, including amendments made during 2013, does not signify a breach of the above laws.

2. **Question of Bad Faith and Conflict:** There is a conflict between the ex-employer's interest and the employee's interest (as an employee who has opened a company). Here, a question arises because the mere registration of a company does not imply operations until all legal formalities, such as acquiring a trade license, are completed. Thus, it may be considered a competitor. For example, Ankit, a software professional, may have designed CRM software in his previous company, while the company he formed may work in developing antivirus software or designing SAP software. Under any circumstances, Ankit's company cannot be labeled a competitor of his ex-employer if the ex-employer deals solely with CRM software. It's like both are butchers, with the ex-employer selling mutton while the employee's company sells only chicken.

3. **Unpredictability of Future Events:** Many things can happen, but we cannot predict the future. The law makes decisions based on evidence of past events, not on future events. For example, a robber cannot be punished today assuming that he will commit a robbery tomorrow. Preemptive punishment is not acceptable.

In my opinion, when the HR and legal team of the previous company realized these facts, they made a hasty decision in terminating Ankit based on his absence to protect their business. Here, they made a mistake.

Correct Method for the Ex-Employer

1. Issuance of a show-cause letter - DONE.
2. Waiting for a reply via registered post - NOT DONE, accepting email, which may prove futile during trial.
3. Following the separation procedure - acceptance of resignation OR following the termination process. Seeking an alternate profession (service/business) is not an offense under the law. Dual employment cannot be considered as Ankit has not joined another employer's service. Moreover, the process of opening a company is still ongoing, and Ankit cannot be considered self-employed under the company until all disputes are resolved, and the company begins operating.

Termination should have been executed with the reason that it is a preventive measure taken by the company to protect its interests, safeguard business information and technology, as Ankit is on the verge of opening a new company. The date of termination should have been effective from the receipt of Ankit's reply. However, there are technical questions arising that cannot be disclosed publicly.

Ankit's ex-employer made mistakes in determining the effective termination dates. They cited absence as a cause and touched on the 'preventive nature' of the termination. Termination is not unjustifiable, but the method and language used in the termination process are problematic. Instead of the labor court, the High Court should be approached as certain sections may grant superior jurisdiction during trial.

My final suggestion to Mr. Ankit Saraf would be to consult with a lawyer before taking any legal action, unless absolutely necessary. Legal action should be taken to protect the business, not out of personal grudge or revenge.

Business or Management Perspective

I would advise Ankit to:

1. Let go of the past.
2. Make a final decision on whether to pursue the business.
3. If opting for the business, expedite the process of obtaining all necessary licenses and permissions from relevant authorities.
4. Since Ankit has chosen a software business, which may involve foreign dealings and foreign exchange, strict compliance with FEMA ACT is essential. Seek clearances from various departments like RBI, ED, etc., if required.
5. Consider getting a Payment Gateway as well.

Ankit, if you decide to pursue the business, you will need to put in a lot of hard work, seek guidance, make investments, and work diligently. Once the business stabilizes, everything will fall into place. I am confident that one day, you will look back and laugh at this challenging phase of being terminated and your determination to fight against it.

In business, sometimes you need to be aggressive, and sometimes defensive. Consider my suggestions and lean towards a defensive strategy. Invest maximum time and effort into your business; it will pay off. If you need any assistance, feel free to reach out to me at [Phone Number Removed For Privacy Reasons].

Regards,
Sovik B

Under any circumstances, this 'TERMINATION' can't be proven legally correct—many loopholes exist on the company's end. Any lawyer will say the same. Even if the company claims that they did so for their business safety, still, this termination can't be proven correct in court or during a trial. Anyway, I have replied to your personal email. You are most welcome to call me anytime you wish.

Regards,
Sovik B