Quasi‑Partnership Breakdown: “Matured” Corporate Opportunities, the No‑Defence of Inability to Exploit, and Insolvency‑Sensitive Unfair Prejudice

1. Introduction

The appeal concerns the fallout from a property development “quasi‑partnership” run through a corporate group: a holding company (Kestral Group Limited) with operating subsidiaries (including SGR Estates Limited and Kestral Construction Limited). The shareholdings were split equally between two family units: the petitioners/appellants on one side and the respondents on the other.

The venture reflected a practical division of labour: one participant primarily funded acquisitions and controlled a key bank account; the other participant managed construction delivery. When funding was withdrawn and the relationship irretrievably broke down (by July 2022), the dispute shifted to whether the construction-side participant, still a director, could take on similar projects through new companies without accounting to the group—and whether that constituted unfair prejudice under s.994 CA 2006.

Two post-breakdown projects were central:

• Holton Road: a property acquired by the group (through SGR) before the breakdown, later sold to a housing association; the refurbishment contract was taken by a new respondent-controlled company.
• Albany Road: a church conversion contract with another housing association, secured after the breakdown via a different new respondent-controlled company; the property itself never belonged to the group.

Key issues

• Whether a director can avoid liability for diverting opportunities by arguing the company could not itself exploit them (e.g., because the company was financially distressed or because the quasi‑partners would not work together).
• How the termination of the quasi‑partnership affects both (a) directors’ fiduciary duties and (b) the availability of member-focused relief for unfair prejudice.
• How insolvency (or near-insolvency) affects “prejudice” under s.994 where the alleged harm is economic value.
• Whether an offer to buy out shares cures alleged unfair prejudice where the allegations are diversion/misuse rather than exclusion.

2. Summary of the Judgment (Court of Appeal)

The Court of Appeal (judgment of Lord Justice Zacaroli; Whipple LJ and Cockerill LJ agreeing) allowed the appeal only to a limited extent:

• Ground 1 (fiduciary breach “defences”): The judge below was wrong in law to treat the group’s inability to exploit the opportunities (including due to financial difficulties) as a defence to breach of fiduciary duty in relation to diversion of opportunities.
• Ground 2 (effect of quasi‑partnership termination): The judge was entitled to find the quasi‑partnership/joint venture ended in July 2022. That meant the petitioners were not unfairly prejudiced merely because the respondents took on future opportunities (such as Albany Road) that would previously have been within the venture’s scope.
• Holton Road distinguished: Holton Road was not a mere future opportunity; it was a maturing opportunity tied to an existing group asset. If it generated profits, failure to account could in principle constitute unfair prejudice—subject to insolvency/loan-account offsets.
• Ground 3 (buy-out offer): The complaint misconceived the first instance decision. The “reasonable offer” point only related to the (failed) exclusion allegation and did not answer diversion/misuse claims. The Court reaffirmed that an accountant-led valuation does not “cure” claims turning on disputed proprietary/accounting issues (following North Holdings Ltd v Southern Tropics Ltd).
• Ground 4 (unequal remuneration): Dismissed; given post-breakdown realities (petitioners no longer working/funding; respondents completing projects), increased remuneration was not unfairly prejudicial on the findings.
• Ground 5 (profitability/wealth inference): Dismissed; the appellate threshold for overturning fact findings was not met.

The Court identified unresolved factual questions (profitability of Holton Road; interaction with the respondent director’s loan account; whether profits would render the group solvent so shares have value). It proposed a filter stage: a hearing to determine whether the petitioners have a real prospect of establishing unfair prejudice on those questions, drawing on Re Tobian Properties Ltd.

3. Analysis

3.1 Precedents cited and how they shaped the decision

(a) The “profit rule” and corporate opportunity doctrine: Recovery Partners GP Ltd v Rukhadze and historic authorities

The Court treated the Supreme Court’s seven-justice decision in Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209 as the controlling modern statement of the profit/conflict rules. The judgment extracted four core propositions relevant to directors alleged to have diverted business:

• The duty to account for profits is a strict rule of conduct, not merely a discretionary remedy for some other wrong.
• A profit must be accounted for if it is made “from, out of, or otherwise sufficiently connected with” the fiduciary relationship.
• Common “defences” do not work: e.g. that the company could not exploit the opportunity, that it would not have made the profit anyway, or that consent would have been given if asked.
• Post-termination profits can still be caught where the opportunity was sufficiently connected to the fiduciary role (mirrored, for directors, by s.170(2) CA 2006).

In reinforcing the strictness of the rule, the Court referenced the classic line of cases cited in Rukhadze, including:

• Keech v Sandford (1726) Sel Cas Ch 61 (foundational strictness: inability of principal to take lease is no defence).
• Regal Hastings Ltd v Gulliver [1967] 2 AC 134 (no defence that company could not itself take the opportunity).
• Industrial Developments Ltd v Cooley [1972] 1 WLR 443 (no defence that company would not have got the contract).
• Boardman v Phipps [1967] 2 AC 46 (no defence that consent would likely have been given).

Applying those principles, the Court held the first instance judge erred in law by treating corporate incapacity (financial difficulty; inability of individuals to cooperate) as negating breach. That error mattered to the correctness of the breach analysis, even though (crucially) it did not automatically establish unfair prejudice.

(b) Directors’ duties in insolvency: BTI 2014 LLC v Sequana SA

Insolvency featured in two distinct ways. First, as to duty content, the Court relied on BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2024] AC 211 for the proposition that when a company is insolvent or bordering on insolvency, directors’ s.172 duty is modified to require regard to creditors’ interests. The Court used this to reject any suggestion that insolvency could excuse diversion: if anything, insolvency makes it harder for members to authorise/ratify conflicted conduct, and it underscores that the director’s loyalty is to the company (and effectively its creditors), not to a broken shareholder relationship.

(c) Unfair prejudice framework: O'Neill v Phillips, Re Saul D Harrison, Re Tobian Properties Ltd

The Court reaffirmed the flexible but principled nature of s.994:

• O'Neill v Phillips [1999] 1 WLR 1092: unfairness usually requires breach of the agreed rules (articles/collateral agreements) but equitable constraints can prevent reliance on strict rights where contrary to good faith; also the “reasonable offer” principle in exclusion cases.
• Re Saul D Harrison & Sons plc [1994] BCC 475: unlawfulness is not necessary for unfairness, but unlawfulness does not automatically compel relief.
• Re Tobian Properties Ltd [2013] EWCA Civ 998: where the company is insolvent, prejudice usually requires showing the shares would have had value but for the wrongdoing; and the court may adopt flexible, staged procedures so parties are not forced into a full valuation/quantum exercise if relief is realistically unavailable.

The Court used Re Tobian Properties Ltd both substantively (the “insolvent shares are valueless unless…” point) and procedurally (the proposed “real prospect of success” filter hearing before incurring further costs).

(d) Buy-out offers where allegations are diversion/misuse: North Holdings Ltd v Southern Tropics Ltd

The Court distinguished the exclusion-focused “reasonable offer” analysis from cases alleging diversion/misuse. It relied on North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625 to explain why an offer to purchase shares at a price set by an independent accountant does not itself answer claims where share value depends on court-determined issues (e.g. constructive trust/account of profits or misuse of assets). That reasoning framed the Court’s view of Ground 3 (even though it held the trial judge had not, in fact, treated the offer as curing the non-exclusion allegations).

(e) Breach of duty does not automatically equal unfair prejudice: O'Donnell v Shanahan

The Court accepted the proposition (cited below at first instance) from O'Donnell v Shanahan [2009] EWCA Civ 751 that breach of fiduciary duty does not automatically translate into unfair prejudice. That idea became central once the Court separated: (i) whether there was a corporate law breach; from (ii) whether members suffered relevant prejudice warranting s.994 relief.

(f) Appellate restraint on fact findings: JSC BTA Bank v Ablyazov

When addressing challenges to factual conclusions (profitability; wealth inference), the Court applied the “plainly wrong” restraint described in JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176.

3.2 Legal reasoning: the Court’s key moves

(1) Separating “breach of duty” from “unfair prejudice”

A central analytical contribution of the decision is the explicit separation between:

• Company-facing fiduciary analysis: whether the director exploited an opportunity sufficiently connected to the directorship (ss.175 and 170(2) CA 2006; the Rukhadze “profit rule” framing).
• Member-facing s.994 analysis: whether the conduct caused the petitioners prejudice in their capacity as members and whether it is unfair in context.

This matters because unfair prejudice petitions are frequently pleaded as an umbrella remedy for what, at base, are fiduciary/accounting complaints. The Court’s approach signals that even where a director may owe an account to the company, a petitioner still must show a route from that wrong to member prejudice that is real and substantial in context—especially where insolvency and director loan accounts may mean shareholders are economically out of the money.

(2) The “no-defence” clarification: inability to exploit is irrelevant to breach

The Court held it was legally wrong to treat as a defence to breach that:

• the companies were in financial difficulties and could not take on the opportunities; or
• the two quasi-partners could not work together again and so the companies were practically unable to exploit the opportunities.

That conclusion is anchored in (i) the strictness re-emphasised in Rukhadze and (ii) s.175(2) CA 2006, which makes the company’s inability to take advantage “immaterial”.

(3) Termination of the quasi‑partnership: it can reshape “unfairness”, but it does not switch off fiduciary duties

The Court accepted the trial judge was entitled to find the parties’ informal joint venture/quasi-partnership was “mutually determined” in July 2022 in the sense that the venture’s operative basis ended when funding was withdrawn and cooperation ceased.

However, the Court drew a sharp distinction between:

• Duties: the director’s fiduciary duties to the companies continued; a shareholder-level breakdown cannot, by itself, free a serving director to appropriate company-connected profits (and insolvency strengthens that conclusion because the relevant constituency becomes creditors).
• Unfairness: when a petitioner has effectively walked away (withdrawing funding and ceasing participation), it may not be unfair—depending on the facts—if the other quasi-partner pursues future similar projects for themselves.

This is a nuanced “equity in context” approach: it does not dilute fiduciary rules, but it does allow the unfair prejudice jurisdiction to reflect commercial reality after a quasi-partnership collapse.

(4) “Maturing opportunity” vs “future opportunity”: why Holton Road differed from Albany Road

The Court’s most concrete factual/legal distinction was between:

• Holton Road: the property was already a group asset (acquired by SGR), contemplated earlier, and discussions with the housing association were underway around the breakdown; the sale proceeds went to the group, but the refurbishment profit opportunity was taken via a new respondent company. This was treated as an opportunity that had “already matured” and “belonged to the company”.
• Albany Road: the property never belonged to the group; the contracting company was incorporated months later; at most it was on the group’s radar as a possible future project. The Court treated it as a “future opportunity” that the respondent could, in the circumstances, pursue without unfairly prejudicing the petitioners.

The decision therefore does not create a blanket permission for directors to pursue competing work post-breakdown while still in office; rather, it suggests that s.994 unfairness may turn on whether the opportunity is properly characterised as part of the company’s existing business/assets pipeline (“maturing”) or merely a new opportunity of the same general type (“future”) after the quasi‑partnership has ended.

(5) Insolvency and director loan accounts: why “breach” may not translate into member prejudice

The Court treated insolvency as potentially decisive for s.994 where the alleged prejudice is purely economic (diminution in share value). Following Re Tobian Properties Ltd, if the group was insolvent such that shares were valueless, the petitioners would generally need to show that recovery of the diverted profits would eliminate the deficiency and yield member value.

Additionally, the Court highlighted a further practical limiter: if the diverted profit was no more than the amount owed to the respondent on a director’s loan account, then (economically) the petitioners could not show prejudice because any “repatriated” profit would be offset by the company’s debt to that director.

(6) Case management innovation: a “real prospect” filter hearing

Recognising that the remaining live issues were narrow but potentially costly, the Court proposed a staged approach analogous to Re Tobian Properties Ltd:

• first, a hearing to decide whether the petitioners have a real prospect of proving (i) Holton Road profits, (ii) profits exceeding the loan account, and (iii) consequent member value; and
• only if that threshold is met, further hearings to determine the merits/quantum.

3.3 Impact: what the decision is likely to change (and what it does not)

(1) Reinforcing strict fiduciary “no-defence” rules in the director opportunity context

Although grounded in Rukhadze and s.175(2), the Court’s explicit correction of the “company couldn’t exploit it” rationale is a practical reminder for company, insolvency, and shareholder litigators: inability to exploit (including because the business is practically paralysed by shareholder breakdown) goes to remedies and prejudice, not to whether the opportunity was improperly taken.

(2) A calibrated approach to quasi‑partnership breakdown under s.994

The decision is significant for quasi-partnership petitions in corporate joint ventures. It indicates that once a joint venture’s cooperative basis ends, a petitioner who has withdrawn participation may face difficulty framing “unfairness” in relation to new business pursued by the other venturer—even if, in a purely fiduciary sense, the other venturer’s conduct remains problematic vis-à-vis the company.

At the same time, it draws a protective line around the company’s existing assets and “maturing” pipeline: those cannot be carved out unilaterally by one faction merely because the relationship has collapsed.

(3) Insolvency sensitivity: s.994 is not a backdoor creditor remedy

By foregrounding Re Tobian Properties Ltd, the Court underlines that unfair prejudice is a member remedy. Where the economic reality is that creditors (not members) are the residual stakeholders, a petitioner must show how the wrongdoing translates into member value (or other member-capacity prejudice). This will tend to narrow s.994 claims in distressed company contexts, or at least force early attention to solvency and value mechanics.

4. Complex Concepts Simplified

4.1 “Profit rule” and “conflict rule”

A fiduciary (including a company director) must not make and keep a profit that is sufficiently connected to their fiduciary position unless the principal consents. Closely related is the duty to avoid conflicts between duty and personal interest. Under s.175 CA 2006, exploiting an “opportunity” can breach duty even if the company could not take it up.

4.2 “Corporate opportunity”

An opportunity is “corporate” if it is connected to the company’s business, pipeline, property, information, or relationships in a way that makes it belong (in equity) to the company rather than to the director personally.

4.3 “Quasi‑partnership”

A small private company can be treated like a partnership for fairness purposes where it is built on personal relationships, mutual confidence, and an understanding of participation in management. That can enlarge the “equitable considerations” relevant to s.994, but it does not erase formal company/director duties.

4.4 “Unfair prejudice” under s.994 CA 2006

A member must show that the company’s affairs were conducted in a way that is both (i) prejudicial to members’ interests and (ii) unfair in context. Breach of duty may contribute to unfairness, but does not automatically prove it.

4.5 Insolvency and why it matters to s.994

If the company is insolvent, shares may be valueless. In that case, a member alleging financial prejudice will usually need to show that the complained-of wrongdoing, if remedied, would create a surplus for members (or otherwise produce member-capacity prejudice).

5. Conclusion: Key takeaways

• No “couldn’t exploit” defence to breach: A director cannot justify diverting an opportunity by saying the company was financially unable to take it, or that the shareholders could not work together.
• But breach ≠ unfair prejudice automatically: The s.994 question remains contextual and member-focused, especially where insolvency/loan accounts may mean no member value is affected.
• Post-breakdown distinction matters: After a quasi‑partnership ends, taking future opportunities may not be unfair; taking a maturing opportunity tied to an existing company asset (Holton Road) may still found unfair prejudice if it generates member-relevant value.
• Procedural pragmatism in distressed disputes: The Court’s proposed “real prospect” filter hearing (inspired by Re Tobian Properties Ltd) signals a readiness to control costs by testing early whether any viable member remedy is realistically available.