Sandhu & Anor v Nagra & Ors

The court heard a petition under s 994 of the Companies Act 2006 alleging that Fashionup Ltd's affairs had been conducted in a manner unfairly prejudicial to the petitioners as members. The judge found that the sole director, Mr Rostum Nagra, operated a cash‑laundering/false invoicing system through a series of sham suppliers and extracted the company’s business and assets by interposing Rocco Fashion Ltd and by manipulating ledgers and credit notes.

The court rejected the respondents' reliance on the Duomatic principle as amounting to valid informal shareholder consent because any consent said to have been given by the petitioners was obtained without full and honest disclosure of material facts; the decision applied the requirement for informed consent as explained in Sharma v Sharma. The judge found multiple breaches of fiduciary and statutory duties by Mr Nagra and that Rocco knowingly received and benefited from those breaches.

Relief was granted in principle in favour of the petitioners by way of an order to buy out their shares. The judge indicated the buyout should be valued as at 20 May 2015 with adjustments to disregard the fabricated supplier invoices and to reconstruct the company’s proper costs and tax position so as to restore the petitioners to the position they would have occupied but for the unfairly prejudicial conduct. The order was to be made against Mr Nagra and Rocco jointly. The parties were given leave to make further submissions, in particular regarding a consequential effect of a proposed CVA.

Background and parties:

• The petition was brought under section 994 Companies Act 2006 by Jatinder Singh Sandhu and JRG (Leicester) Ltd, shareholders in Fashionup Ltd, alleging that Mr Rostum Nagra (sole director) and related companies conducted the company's affairs in a manner unfairly prejudicial to their interests.
• Fashionup carried on garment manufacture for a major customer, Select; the petitioners alleged that from October 2014 Mr Nagra used a network of purported CMT suppliers to generate false VAT‑inclusive invoices, extract cash, and divert profits and sales to Rocco (a company controlled by Mr Nagra), leaving Fashionup with negligible assets.

Relief sought and procedural posture:

• The petitioners sought a buyout of their shares under s 994. They also sought alternative relief including permission to bring derivative claims if a buyout was not ordered.
• The trial addressed liability and whether a buyout order should be made; valuation was to be fixed later if buyout ordered.

Issues framed:

• Whether Fashionup’s affairs had been conducted in a manner unfairly prejudicial to the petitioners.
• Whether alleged shareholder consent could validate the conduct, relying on the Duomatic principle.
• Whether Mr Nagra (and Rocco as recipient) committed breaches of duty through false invoicing, undisclosed cash dealings and transfers of business, and whether the court should order a buyout and fix an appropriate valuation date and basis.

Evidence and findings:

• The judge assessed handwritten manuscripts, a multi‑page cashbook and a cashback schedule, delivery acknowledgements, bank ledgers and expert handwriting evidence. The petitioners’ expert concluded the manuscript material was predominantly in Mr Nagra’s hand; the judge accepted that conclusion on the balance of probabilities.
• The judge found that the manuscript cash records represented off‑books cash transactions: cash payments of wages and cash payments to real CMT manufacturers, and receipts from arrangements with sham suppliers who returned the VAT‑exclusive element less a retained margin. The cashback schedule showing the calculation ("÷1.2 +9") was found to record the VAT‑split arrangement.
• The judge found that supposed suppliers (eg Stylewear Ltd, Sewing Box Ltd and others) provided false invoices at inflated prices and that many such companies were short‑lived or dissolved. Witnesses produced by the respondents either did not attend trial or gave unconvincing evidence and produced no corroborating business or bank records; adverse inferences were drawn where appropriate.
• The judge rejected the respondents' account that the petitioners had validly consented to the transfer or closure under the Duomatic principle, relying on Sharma v Sharma to require informed unanimous shareholder consent. The judge concluded any consent was obtained by deception and suppression of material facts and was therefore ineffective.

Reasoning and outcome on relief:

• The court held there was unfairly prejudicial conduct. The judge exercised the wide discretion under s 994 to restore the petitioners to the position they would have occupied but for the misconduct, proposing a buyout of the petitioners' shares on the basis of the Company's value at 20 May 2015, adjusted to exclude the fabricated supplier invoices and to reflect reconstructed legitimate CMT costs and tax/VAT positions.
• Rocco was held jointly liable as it participated in and knowingly benefitted from the breaches. The judge directed further submissions on detailed relief, noting a pending proposal by Select for a company voluntary arrangement might be relevant.

The petition under section 994 Companies Act 2006 succeeds. The court found that Mr Nagra conducted Fashionup's affairs in a manner unfairly prejudicial to the petitioners by operating a false‑invoicing/cashback scheme, diverting sales and assets to Rocco and manipulating accounts; any informal shareholder consent relied upon was ineffective because it was not informed. The court ordered in principle that the petitioners' shares be bought out, with valuation to be fixed (proposed valuation date 20 May 2015 and reconstruction to disregard sham supplier invoices); the order is to be made against Mr Nagra and Rocco jointly. The judge invited further submissions before making final orders, in particular about the effect of a proposed CVA.