Stubbins Marketing Limited v Stubbins Food Partnerships Limited & Ors

Key legal principles and holdings: The court applied the Duomatic principle (In Re Duomatic Ltd) and confirmed that informal shareholder assent must be fully informed to validate a substantial property transaction under section 190 Companies Act 2006. Directors owe statutory and fiduciary duties under Part 10 Chapter 2 (notably sections 171, 172, 174 and 175) and may be liable for equitable compensation under section 178 and indemnity under section 195 where a transaction involving related parties is not properly authorised. The court found multiple breaches of duty by some directors in relation to the design and implementation of the April 2016 transaction, failures to obtain independent valuation and separate legal advice for the vendor, and various related-party payments and transfers, including the sale of a 50% shareholding in Sedge Green Salads for nominal consideration. Section 1157 relief was refused.

This first-instance trial concerned claims by Stubbins Marketing Limited (SML) against several directors and related companies arising from a complex restructuring and asset transfer (the Transaction) completed on 1 April 2016. SML sought damages and/or equitable compensation under section 178 Companies Act 2006 and an indemnity under section 195(3)(b) relating to (inter alia) an asset sale and leases to companies controlled by certain directors, alleged unauthorised transfers of value, diversion of business and improper payments.

Background and parties: SML was a family-run market-gardening business. The Transaction sold most of SML’s trading business and the Waltham Cross (WX) Hub to companies (SFP, SGP, LPL) controlled by four director-shareholders. Several original shareholders (the older generation) and younger family directors were involved. The case centrally concerned whether the shareholders gave valid unanimous informal consent under the Duomatic principle (such consent would validate the section 190 requirement for substantial property transactions) and whether directors breached their duties in causing or implementing the Transaction and certain payments.

Nature of the claim / relief sought: SML sought equitable compensation/damages and indemnity for (i) breach of duty in causing the Transaction without fully informed shareholder consent, (ii) related-party transfers and undervalued asset transfers (including the WX Hub and a 50% stake in Sedge Green Salads), (iii) various contentious payments to third parties and service companies (including payments to Mr Smith/Kombbi/Kore Creative/FPIL), (iv) improper building works funded by SML for directors' homes, and (v) consequential losses including rents, tax losses and diverted business receipts.

Issues before the court:

• Whether shareholders gave valid, unanimous, fully informed informal consent so as to engage the Duomatic principle and to satisfy section 190 CA 2006;
• Whether directors breached duties (sections 171, 172, 174, 175) in the planning and implementation of the Transaction, valuation and disclosure failures, failure to procure independent advice, related-party dealings and authorising payments in kind;
• Quantification of loss (undervalue of assets, lost rents, tax losses, improper payments) and the availability of proprietary remedies (rescission, account of profits) and section 1157 relief.

Court’s reasoning (concise): The judge made extensive factual findings about family control, the development of the new commercial strategy, the negotiations with Barclays and HSBC and the drafting and completion of the Transaction documents. The court concluded that:

• The three younger directors were not legally appointed Group Class Representatives and the Duomatic principle could only operate on the basis of unanimous, fully informed consent by all shareholders. The court held that shareholders were not fully informed of material matters (notably the true Bidwells valuation of the WX Hub at £11.45m vs the agreed sale price of £10m; inadequate explanation of how rents and assumed liabilities were calculated; and an incomplete picture of Barclays' position and the true reasons for changing banks). The consent that was given in escrow and the subsequent authorisations did not cleanse the defects.
• Directors breached duties by structuring the Transaction around available funding rather than taking adequate steps to obtain independent valuations and separate vendor advice, by failing to explain material facts to shareholders, by causing undervalued transfers (notably the WX Hub/associated assets and the transfer of SGS shares for nominal consideration), and by permitting or procuring inappropriate payments (including certain payments to Kombbi/Kore Creative and building works on directors' homes) and improper security (the Kombbi debenture).
• Some payments and arrangements had elements of bona fide commercial judgment or arguable explanations, but many actions were unreasonable in the circumstances and could not be excused under section 1157.
• The court quantified a number of losses and allowed various claims in part (including compensation for undervalued asset transfers, the SGS share transfer, certain unlawful payments and recovery of the Kombbi debenture), while rejecting other heads where causation or loss was not proved.

Wider context: The court reiterated the strict requirements for shareholder assent under Duomatic and the need for full disclosure in related-party and management buy-out contexts; the decision illustrates the court’s careful factual scrutiny in director duty litigation and the rarity of relief under section 1157 where conduct is unreasonable.

First instance: The court held that key directors had acted in breach of their duties in various respects while implementing the Transaction. The Duomatic principle did not validate the Transaction because shareholders were not given fully informed unanimous assent (material facts were withheld or mispresented, including the true valuation of the WX Hub and the bank position). The court therefore allowed a number of SML's claims in part: it found unlawful or inequitable transfers and payments (including the SGS share transfer and a number of payments to third parties/service companies and improper security) and awarded equitable compensation and other remedies where causation and loss were established. The court refused to relieve the directors under section 1157. The judgment disposes of multiple pleaded issues by detailed factual findings and legal reasoning applying sections 171, 172, 174, 175, 178 and 195 Companies Act 2006 and the Duomatic principle.