Sandhu & Anor v Nagra & Ors

Informal shareholder consent can authorise, waive or ratify conduct only where it is given with full knowledge of the relevant facts. Consent obtained by deliberate deception or material non-disclosure is ineffective. Consent to close a company does not, without informed agreement, authorise the transfer of its business or assets for no consideration to a company controlled by the director. A director must realise the proper value of the company’s business and assets for the company and its shareholders unless a valid alternative arrangement has been agreed. Where unfairly prejudicial conduct has stripped shares of their value, the appropriate remedy may be a buy-out designed to restore the value the shares would have had absent that conduct.

The petitioners, shareholders in Fashionup Ltd, presented a petition under section 994 of the Companies Act 2006. They alleged that Rostum Nagra, Fashionup’s sole director, conducted its affairs unfairly prejudicially by operating a cash-laundering and false-invoicing scheme, diverting profits, and transferring Fashionup’s business and assets to Rocco Fashion Ltd, a company he controlled.

The respondents relied on the alleged agreement of the shareholders to close Fashionup and permit Mr Nagra to establish a new business. The central issues were whether any such consent was given, whether it was informed and effective, whether the impugned conduct breached Mr Nagra’s duties, and what relief should follow.

1. Petition succeeded. The court found that Fashionup’s affairs had been conducted in a manner unfairly prejudicial to the interests of both petitioners.
2. Mr Nagra operated a cash book recording off-the-books transactions. The purported CMT suppliers issued false or inflated invoices, while genuine CMT work was paid for in cash at lower rates. The arrangements generated cash for Mr Nagra’s benefit and falsified Fashionup’s accounts and likely its VAT and tax returns.
3. Mr Nagra also diverted Fashionup’s business to Rocco. Fashionup continued to bear wages, premises and other operating costs after sales were invoiced through Rocco. Credit notes and the writing off of sums due from Rocco were used to eliminate Fashionup’s assets and transfer value without consideration.
4. The respondents relied on the Duomatic principle, derived from Re Duomatic Ltd [1969] 2 Ch 365. Following Sharma v Sharma [2013] EWCA Civ 1287, the court held that informal consent requires full knowledge of the relevant facts. Any agreement by Jatinder Sandhu to close Fashionup was ineffective because Mr Nagra concealed the transfer to Rocco, the cash-laundering scheme and Fashionup’s true financial position, and falsely represented that trading was difficult.
5. Even if closure had been validly authorised, that did not amount to consent to transfer Fashionup’s business and assets to Rocco for no consideration. A director closing a company must realise the proper value of its business and assets for the company and its shareholders unless a valid alternative arrangement has been agreed.
6. The court proposed a buy-out of the petitioners’ shares by Mr Nagra and Rocco jointly. Valuation was to be undertaken as at 20 May 2015, immediately before the transfer of value began, with appropriate adjustments to remove the effect of the false supplier invoices. Further submissions were invited concerning a proposed CVA affecting Select.