Guorui Song & Anor v Kes Smith & Ors

The petitioners brought an unfair prejudice petition under section 994 of the Companies Act 2006, alleging fraud and breaches of directors' duties (sections 171–175) by the first respondent and related diversion of corporate opportunities. The court examined contemporaneous documents, accounting material and oral evidence and found that the alleged misappropriations, unexplained payments and improper diversions were not established. The judge accepted that cash withdrawals and supplier payments were explained by the respondents as project expenses, that payroll and mileage claims had plausible explanations, and that post-breakdown projects were not wrongfully diverted because the joint venture had been mutually determined and the companies were financially unable to take them on. The court also found that the deed concerning 10 Cyncoed Road was valid and that the property is held on trust for the Smiths.

The court therefore dismissed the petition and the parts of the counterclaim relating to the Company, but upheld the claim concerning 10 Cyncoed Road and directed the parties to agree consequential orders.

Background and parties:

• The petitioners are Mr Song and Mrs Zhao; the respondents are Mr and Mrs Smith and several Kestral group companies. The group developed residential conversions for housing associations and private sale using a quasi‑partnership/joint venture model.
• Relations broke down in mid‑2022 after Mr Song withdrew funding and purchased a London home. The petitioners alleged fraud, misappropriation, breaches of fiduciary and statutory duties and diversion of business; the respondents denied unfair prejudice and counterclaimed alleging prejudice by the petitioners.

Nature of the claim and relief sought:

• The petition was framed as an unfair prejudice petition under section 994 Companies Act 2006 seeking remedies for alleged oppressive or prejudicial conduct (including alleged breaches of sections 171–175 CA 2006), and a declaration/relief concerning ownership of 10 Cyncoed Road.

Issues for decision:

• whether the petitioners proved fraud or breaches of directors' duties in relation to cash withdrawals, unexplained transfers, supplier payments, payroll, mileage claims and family payments;
• whether post‑breakdown contracts were wrongfully diverted from the company group to companies controlled by the Smiths;
• whether an implied or express term of the joint venture required Mr Song to fund all projects; and
• whether 10 Cyncoed Road is held on trust for Mr and Mrs Smith.

Court’s reasoning and findings:

• The judge assessed credibility (with interpreters and assistance) and gave particular weight to contemporaneous documents, texts and accounting records. Many allegations of fraud failed for lack of cogent evidence: cash withdrawals were explained as payments to subcontractors and site managers; large supplier payments were supported by invoices and statements; payroll and mileage claims had plausible business explanations.
• The court found that, as of July 2022, the joint venture came to an end by words and/or conduct when the parties decided they no longer wished to work together and that Mr Song was entitled to refuse further funding. An open‑ended funding obligation by Mr Song was unlikely to have arisen and was not established.
• Post‑breakdown projects taken by companies controlled by the Smiths were not wrongful diversions because the companies were insolvent or incapable of taking on the work and the Smiths completed existing contracts and lawfully took on new contracts. The judge concluded there was no breach of duties under sections 171–175 CA 2006 and, even if there had been, that would not automatically amount to unfair prejudice.
• On the proprietary point the court accepted evidence that the deposit for 10 Cyncoed Road derived from Mr Smith’s share of profit and that the signed declaration amounted to an irrevocable declaration that Mr Song held the property on trust for Mr Smith; the deed was binding and transfer was ordered.

Disposition: The petition and the company‑related counterclaim were dismissed; the claim in respect of 10 Cyncoed Road succeeded and the Smiths are entitled to a transfer of that property. The court invited the parties to agree a draft order and file submissions on consequential matters.

This was a first instance judgment. The petition under section 994 Companies Act 2006 and the counterclaim relating to the Company were dismissed because the court found no cogent evidence of fraud, misappropriation or breach of directors' duties sufficient to establish unfair prejudice; the joint venture was mutually determined in July 2022 and post‑breakdown contracts were not wrongfully diverted. However, the court held that the deed concerning 10 Cyncoed Road is binding: the property is held on trust for Mr and Mrs Smith and the petitioners are bound to transfer it. The court directed the parties to agree consequential orders.