Guorui Song & Anor v Kes Smith & Ors

A shareholder petition under Companies Act 2006, section 994, requires conduct of the company’s affairs causing real and substantial prejudice to a shareholder’s interests as a member, and the prejudice must be unfair. A breach of directors’ duties does not automatically establish unfair prejudice. Where a joint venture between shareholder-directors has mutually ended, a director may pursue new business personally or through another company where the existing companies were unable to undertake it and no corporate opportunity or asset was diverted. Exclusion will not ordinarily be unfair where the respondent makes a reasonable, fairly valued buyout offer.

The petitioners and respondents were equal shareholder-directors in a company operating a property-conversion group as a quasi-partnership. After the parties’ relationship broke down, the petitioners alleged fraud, breaches of fiduciary and statutory duties, diversion of business, and unfair prejudice under section 994 of the Companies Act 2006. The respondents denied wrongdoing and brought a counterclaim alleging unfair prejudice by the petitioners.

The respondents also claimed that a Cardiff property was held by the first petitioner on trust for them. The principal issues were whether the alleged conduct constituted unfair prejudice, whether the joint venture and associated funding obligations continued after July 2022, whether new projects had been diverted from group companies, and whether the first petitioner was bound by a declaration of trust.

1. The petition and the counterclaim concerning the Company were dismissed. The first respondent succeeded in relation to 10 Cyncoed Road, and the first petitioner was bound by the deed declaring that he held the property on trust for the first respondent absolutely.

2. The court found no fraud, breach of the joint venture agreement, or breach of directors’ duties in relation to the pre-breakdown allegations. The evidence established that the disputed withdrawals, payments, salaries, payroll entries, mileage claims and expenditure were sufficiently explained or supported.

3. The joint venture agreement did not include an express or implied unconditional obligation on the first petitioner to continue funding every project. The parties mutually determined the joint venture in July 2022 by words and/or conduct. The first petitioner was entitled to refuse further funding.

4. After the joint venture ended, the first respondent was entitled to complete the existing projects and undertake new housing-association projects through other companies. The existing group companies were financially unable to take on the new contracts, and there was no sufficient evidence that corporate knowledge, names or other assets had been misused.

5. The court applied the approach in BTI 2014 LLC v Sequana SA [2024] AC 211. The creditor-interest aspect of the duty to promote the company’s success arises when insolvency is imminent and requires appropriate weight to be given to creditors’ interests. On the facts, no breach of sections 171 to 175 was established.

6. A breach of duty would not automatically amount to unfair prejudice: O’Donnell v Shanahan [2009] EWCA Civ 751; [2009] BCC 822. The statutory concepts of prejudice and unfairness are broad but must be real, substantial and assessed in context.

7. Following O’Neill v Phillips [1999] 1 WLR 1092, exclusion without a reasonable offer to purchase the minority interest may be unfair, but exclusion is not unfair where a reasonable offer is made. The respondents’ offer was reasonable because it exceeded the accountants’ valuation, was made shortly after the breakdown, and allowed an independent valuation process.

8. The parties were directed to file an agreed draft order, with written submissions on consequential matters not agreed, within 14 days of hand-down.

First-instance decision. No prior appellate decision is stated in the judgment.