Stubbins Marketing Ltd v Stubbins Food Partnerships Ltd & Ors

A substantial property transaction between a company and companies connected with its directors requires the approval prescribed by the Companies Act 2006, unless the Duomatic principle supplies fully informed unanimous shareholder assent. Full information includes material facts, the manner in which they are presented, and sufficient opportunity to understand their significance.

Directors negotiating on both sides of a management buy-out must protect the selling company’s interests. In an exceptional transaction they should obtain separate legal advice and independent valuation advice, consider alternatives, and avoid structuring the transaction solely around the purchaser’s available funding. Directors cannot rely on statutory relief where their conduct was unreasonable and conflicted.

The claimant company brought claims against former directors and connected companies arising from a management buy-out and related restructuring. The transaction transferred the claimant’s businesses and the WX Hub property, granted leases of other sites, transferred shares in Sedge Green Salads Ltd, and involved deferred consideration and refinancing by HSBC.

The claimant alleged breaches of statutory and fiduciary duties, unlawful substantial property transactions, diversion of assets and opportunities, unauthorised payments, and inadequate shareholder consent. The central issues included whether the shareholders had given fully informed unanimous assent under the Duomatic principle, whether the directors had acted in the claimant’s interests, and what loss and remedies followed.

1. Transaction and shareholder consent. The transaction was a substantial property transaction under section 190 of the Companies Act 2006. The evidential burden lay on the directors to establish the identity and informed assent of every shareholder entitled to vote. The original shareholders were not legal proxies for shares transferred to the younger generation, and no Group Class Representatives had been appointed under the Articles.
2. The Duomatic principle could supply statutory approval and ratification, but only through fully informed assent. The shareholders were not adequately informed about the market rents for Fen Drayton and Waltham Abbey, the calculation of transferred liabilities, the WX Hub’s £11.45 million valuation compared with the £10 million transfer price, or Barclays’ willingness to continue supporting SML on an alternative structure. The assent was therefore ineffective.
3. The directors breached duties under sections 171, 172, 174 and 175 of the Companies Act 2006. They caused SML to enter an unlawful transaction, failed to obtain timely separate legal advice and independent valuation advice, failed properly to consider alternatives, and prioritised a structure designed around HSBC’s funding and their interests in the purchasing companies.
4. The directors were not entitled to relief under section 1157. Although they were not found to have acted dishonestly in designing the rescue, their failure to keep SML’s interests under continuing review, their misleading presentation of Barclays’ position, diversion of business before approval, and other conduct were unreasonable.
5. The court assessed loss from the transaction at £4,603,239 for the undervalued assets, £692,058 for under-rented properties, £257,400 for transferred tax losses, and recoverable transaction costs in accordance with the judgment. Additional claims succeeded in relation to diverted stock and cash, the SGS shares, specified payments, building works and remuneration overpayments. Claims concerning the Randall settlement, VAT, the loss-making import business and the David Platt opportunity failed.
6. The Kombbi debenture was procured in breach of duty, was subject to Mr Smith’s knowledge of the breach, and was rescinded. The claims against the directors were not “Business Claims” transferred under the APA.
7. The parties were directed to agree an order, with consequential matters to be dealt with at a further hearing if necessary.

First-instance decision. The judgment directed the parties to agree an order reflecting its findings.