12345 Retail Group Ltd v Bubble City Ltd & Ors

The court held that the transfer to Bubble City Ltd of the sole subscriber share in Bubble Citea Ltd effected by the Settlement Agreement of 12 August 2020 (clause 2.2) was void because it was agreed and implemented by Mr Qingheng Meng in breach of his fiduciary duties to Enno Capital Ltd. The transfer was not a bona fide compromise of a genuine dispute. The judge found that Mr Suneet Sachdeva knowingly and dishonestly assisted the breach and that Bubble City received the subscriber share with knowledge amounting to knowing receipt.

Consequently the Claimant (as assignee of Enno’s claims) had a proprietary claim in respect of the Subscriber Share; the equitable interest in that share remained with Enno and could be traced into the 99 ordinary shares later issued on 3 December 2021, so that the Claimant had a proprietary claim to the whole issued share capital of OpCo. The court ordered transfer of the 100 shares to the Claimant and awarded equitable compensation of £1,800,000 against Mr Meng, Mr Sachdeva and Bubble City Ltd, jointly and severally. Claims against Mr Yijian Gao and Citea Outlets Ltd were dismissed.

Background and procedural posture. This is a first-instance trial of claims brought by 12345 Retail Group Ltd as assignee of Enno Capital Ltd's claims against Bubble City Ltd, Mr Qingheng Meng, Mr Suneet Sachdeva and others concerning control of a bubble tea business. The dispute follows earlier unfair prejudice proceedings (Re Enno Capital Ltd [2022] EWHC 1819 (Ch)) and concerns transfers made on 25 August 2020 under a written Settlement Agreement dated 12 August 2020 and related arrangements (including a memorandum of understanding and exclusive supply agreements with Jing Capital Ltd).

Nature of the claim/applications. The Claimant sought the return of the sole subscriber share in Bubble Citea Ltd (OpCo), proprietary remedies (including tracing and constructive trust), equitable compensation for diminution in value, and in the alternative damages for unlawful means conspiracy; it advanced causes of action including breach of fiduciary duty, dishonest assistance and knowing receipt.

Issues for decision. The court concentrated on seven main issues: (i) whether the Settlement Agreement and the transfer of the Subscriber Share were void for lack of authority and/or because of a breach of directors' fiduciary duties; (ii) whether the Claimant had a proprietary claim to the Subscriber Share and whether Bubble City’s receipt amounted to knowing receipt and whether Mr Sachdeva was liable for dishonest assistance; (iii) whether the Claimant could trace into the 99 shares issued in December 2021 or rely on a remedial constructive trust; (iv) whether the 99-share allotment was for an improper purpose and susceptible to rectification of the register; (v) whether the Claimant could obtain substantial equitable compensation and, if so, how to value it; (vi) the proper valuation and date for assessment; and (vii) whether there was an unlawful means conspiracy.

Court's reasoning and findings.

• The judge found that although there was a real dispute with Mr Sachdeva over his recall rights under the business purchase agreement, clause 2.2 of the Settlement Agreement (the transfer of OpCo’s subscriber share to Bubble City) was not a bona fide compromise. It was conceived and implemented by Mr Meng to export the value of the Bubble Citea business out of Enno, preferring his own and Mr Sachdeva’s interests and breaching fiduciary duties (including the creditor duty given Enno’s parlous finances). Clause 2.2 was therefore void and severable from clause 2.1 (the return of the Bubble City share to Mr Sachdeva).
• The court found that Mr Sachdeva knowingly and dishonestly assisted Mr Meng in that breach; his knowledge is attributable to Bubble City. On the basis of equitable principles endorsed in the Supreme Court’s recent authority, the equitable interest in the transferred subscriber share remained with Enno and could not be retained by Bubble City as a bona fide purchaser for value without notice. The Claimant therefore had a proprietary claim to the Subscriber Share and to the 99 shares issued in December 2021 by tracing the value into those newly issued shares.
• The judge rejected an alternative basis for a proprietary claim based on constructive trusteeship in relation to the 99 shares. He also held the Claimant lacked standing, at the time, to seek rectification of OpCo’s register in the manner suggested and in any event found the 99-share allotment was not for an improper purpose on the facts.
• On remedies the court awarded equitable compensation rather than an account of profits. Applying the counterfactual approach in Target Holdings and AIB (assessing value with the benefit of hindsight and on a ‘‘but for’’ basis), the judge fixed the appropriate counterfactual and the valuation assumptions and, on the expert evidence, assessed equitable compensation at £1,800,000. The claim for unlawful means conspiracy was made out as between Mr Meng, Mr Sachdeva and Bubble City but not against Mr Gao, and in any event overlapped with the primary remedies.

Implications. The decision applies established equitable principles on fiduciary breach, knowing receipt and tracing, confirms the court’s willingness to excise offending clauses and to impose proprietary remedies and equitable compensation where a director’s conduct has exported company value, and illustrates the careful counterfactual analysis required when assessing equitable compensation.

This first-instance claim succeeded in part. The court declared that clause 2.2 of the Settlement Agreement (the transfer of the OpCo subscriber share to Bubble City) was void for breach of fiduciary duty by Mr Meng, excised that clause, and held that Mr Sachdeva had dishonestly assisted the breach and Bubble City had knowingly received the share. The Claimant (as assignee of Enno) therefore has a proprietary claim to the Subscriber Share and, by tracing, to the 99 shares issued on 3 December 2021. The court ordered Bubble City (by its director) to transfer the 100 OpCo shares to the Claimant and assessed equitable compensation at £1,800,000 payable jointly and severally by Mr Meng, Mr Sachdeva and Bubble City. Claims against Mr Gao and Citea Outlets Ltd were dismissed. Rationale: breach of fiduciary (and creditor) duties, dishonest assistance, knowing receipt, tracing into subsequently issued shares, and a counterfactual calculation of equitable compensation under the principles in Target Holdings/AIB and related authorities.