12345 Retail Group Ltd v Bubble City Ltd & Ors

A company director’s power to bind the company does not validate a transaction entered into in bad faith to extract the company’s business for the director’s own benefit where the counterparty knows of the breach. A provision transferring company property may be void and severable from the remainder of an agreement.

Where company property is misapplied, the company may retain an equitable interest sufficient to support proprietary relief, knowing receipt and tracing. Value in an original shareholding may be traced into newly issued shares where the issue transfers substantially the value of that holding.

Equitable compensation is assessed by comparing the asset’s actual value with its value in the most probable counterfactual absent the breach. The reflective-loss rule does not bar a creditor’s claim for loss caused by being deprived of a shareholding.

The claimant, an assignee of claims formerly held by Enno Capital Ltd, challenged the transfer of Bubble Citea Ltd’s sole share in Bubble Citea Ltd to Bubble City Ltd under a Settlement Agreement. The claimant alleged that the transfer was made by Mr Meng in breach of fiduciary duty, with Mr Sachdeva’s knowledge, to remove the business from Enno and place it beyond the reach of Enno’s creditors.

The claimant also sought proprietary relief concerning 99 later-issued shares, equitable compensation, and damages for unlawful means conspiracy. The central issues were whether the transfer was a valid compromise, whether the claimant could trace into the later shares, whether the reflective-loss rule applied, and the proper counterfactual measure of equitable compensation.

1. Settlement Agreement. There was a genuine dispute concerning Mr Sachdeva’s recall of Bubble City and his compensation claims. However, clause 2.2, transferring the Subscriber Share in Bubble Citea Ltd to Bubble City, was not a good-faith compromise. Mr Meng entered it to remove the business from Enno, preferring his own interests and those of Mr Sachdeva. The transfer rendered Enno insolvent and engaged the creditor duty. Mr Sachdeva knew of the breach and acted in bad faith.
2. Applying the principles in [2012] EWHC 61 (Ch), clause 2.2 was void. Under the severability clause it could be deleted without invalidating clause 2.1, which validly transferred the Bubble City share to Mr Sachdeva. Mr Gao was not shown to have breached fiduciary duty.
3. Proprietary relief and tracing. Enno retained the equitable interest in the Subscriber Share after its transfer. Bubble City was not a bona fide purchaser for value without notice. Mr Sachdeva dishonestly assisted Mr Meng’s breach, and Bubble City was liable in knowing receipt.
4. The value in the Subscriber Share could be traced into the 99 shares issued to Bubble City. Following the reasoning in [2017] (2) CILR 136, the court treated the issue as transferring substantially the value of the original shareholding. The alternative constructive-trust arguments failed because a remedial constructive trustee is not thereby subject to fiduciary duties concerning later business opportunities or newly created property.
5. The claimant lacked standing under section 125(1) of the Companies Act 2006 to seek rectification as a person aggrieved, because it was not presently entitled to be registered as a member. In any event, the 99 shares had not been issued for an improper purpose.
6. Equitable compensation. The claim was not barred by reflective loss. It concerned the reduction in the value of OpCo caused by Enno’s deprivation of its shareholding, rather than a shareholder’s claim merely reflecting loss suffered by OpCo. Applying [1996] AC 421 and [2014] UKSC 58, compensation was assessed by comparing OpCo’s actual value with its value in the most probable no-breach counterfactual. The difference was £1,800,000.
7. Conspiracy and orders. Unlawful means conspiracy was established against Mr Meng, Mr Sachdeva and Bubble City, but not Mr Gao. Bubble City was declared to hold all 100 shares as nominee for the claimant and was ordered to transfer them. Mr Meng, Mr Sachdeva and Bubble City were jointly and severally liable for £1,800,000. The claims against Mr Gao and Citea Outlets Ltd were dismissed.