Factual and Procedural Background
The Appellants brought a petition under s.994 Companies Act 2006 concerning Company A (a holding company) whose shares were held equally between the Appellants and the Respondents. Company A owned Company B and Company C (the "Group"), which developed and sold properties in and around The City. The parties operated the Group under an informal joint venture or "quasi-partnership" in which, broadly, the Appellants provided funding and the Respondents managed construction work. The relationship broke down by July 2022 after the Appellant withdrew funding. The Appellants alleged (i) misappropriation of Group funds prior to July 2022 and (ii) that, after the breakdown, the Respondents diverted refurbishment contracts for two properties to companies the Respondents incorporated (Company D and Company E), in breach of fiduciary duties and causing unfair prejudice. HHJ Judge Jarman KC dismissed the petition on 1 May 2025. The Appellants appealed; the Court of Appeal (Judge Zacaroli delivering the lead judgment, with Judges Whipple and Cockerill agreeing) heard the appeal on 12–13 May 2026 and gave judgment on 9 June 2026.
Legal Issues Presented
- Whether a director who, after a breakdown in a joint venture and withdrawal of the other party's funding, pursues business opportunities of the same type as the joint venture without accounting for profits, breaches fiduciary duties (notably under ss.172 and 175 CA 2006) and the profit/conflict rules.
- Whether such a breach (if established) amounts to unfair prejudice to the other shareholders under s.994 CA 2006.
- Whether the termination (by conduct) of the informal joint venture in July 2022 affected the existence or scope of the director's fiduciary duties and/or the unfair prejudice analysis.
- Whether an offer by the Respondents to buy the Appellants' shares could cure alleged unfair prejudice.
- Whether the factual findings on profit and on unequal drawings of remuneration were erroneous.
Arguments of the Parties
Appellants' Arguments
- The Respondents diverted business opportunities (Holton Road and Albany Road) to companies they formed, in breach of fiduciary duties and without accounting for profits.
- The Judge erred in treating the companies' inability to take up those opportunities (financial difficulties or refusal to cooperate) as a defence to breach of duty.
- The Judge wrongly concluded the joint venture had been terminated in a way that released the Respondents from duties owed to the companies.
- The Respondents' offer to buy shares could not cure unfair prejudice arising from misappropriation or diversion; these matters require court determination.
- The Judge was wrong in fact about company profitability and failed to give weight to unexplained increases in the Respondents' wealth; unequal salary drawings also caused unfair prejudice.
Respondents' Arguments
- The Judge correctly rejected most misappropriation allegations; only the unequal salary drawing point remained but was not excessive given continued work by the Respondents after funding ceased.
- If the joint venture was mutually determined in July 2022, the Respondents were entitled to pursue future projects themselves; Holton Road and Albany Road were either post-termination opportunities or (in the case of Holton Road) not a loss enhancing the Appellants' share value.
- Any profits generated were used to enable completion of Group projects and to pay creditors; the Group was insolvent or borderline insolvent so any diversion would not have enhanced the Appellants' share value.
- The Respondents offered to buy the Appellants' shares (including by independent valuation/audit), and that offer addressed exclusion complaints; other alleged wrongs required court determination but did not show unfair prejudice.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Keech v Sandford (1726) Sel Cas Ch 61 |
Historical authority underlying the profit/conflict rules for fiduciaries. |
Referenced as part of the long antiquity of the profit rule. |
| Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209 |
Modern authoritative exposition of the profit rule: fiduciaries must account for profits made from or sufficiently connected to their fiduciary position; duty continues post-termination where opportunity arose during fiduciary role. |
Adopted as the primary authority for the profit/conflict rules and applied to assess whether post-termination profits from Holton Road/Albany Road fell within the duty to account. |
| Regal Hastings Ltd v Gulliver [1967] 2 AC 134 |
Illustrates strictness of fiduciary duty to account for profits even where company could not itself take opportunity. |
Cited to show that inability of company to exploit an opportunity is not a defence to account for profits. |
| Boardman v Phipps [1967] 2 AC 46 |
Consent by the company can be a defence; limits on profit rule where company would have permitted the conduct. |
Cited as a recognized exception where company consented to the fiduciary exploiting the opportunity. |
| Industrial Developments Ltd v Cooley [1972] 1 WLR 443 |
Example that a director cannot keep profits obtained by diverting an opportunity even if company would not have obtained profit. |
Used to support the proposition that it is no defence that the company would not have made the profit. |
| O'Donnell v Shanahan [2009] EWCA Civ 751 |
Authority that breach of fiduciary duty does not automatically equate to unfair prejudice. |
Cited to show that even if breach established, unfair prejudice requires separate analysis. |
| O'Neill v Phillips [1999] 1 WLR 1092 |
Principles governing unfair prejudice, including that exclusion accompanied by a reasonable buy-out offer may not be unfair. |
Applied in assessing whether the Respondents' offer to buy the Appellants' shares removed any unfairness from an exclusion claim. |
| North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625 |
Where value depends on whether a business constitutes trust property of the company, valuation issues should be determined by the court, not an accountant; buy-out offers do not necessarily cure prejudice about misuse of assets. |
Relied on to reject the proposition that a buy-out offer alone answers allegations of asset misuse/diversion. |
| BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2024] AC 211 |
Directors' duties shift on insolvency toward creditors; insolvency affects ratification and the interests to be considered. |
Applied to explain that insolvency does not absolve directors from accounting to the company, but affects who has the economic interest (creditors) and may affect whether shareholders are prejudiced. |
| Re Saul D Harrison & Sons plc [1994] BCC 475 |
Unfairness may exist without illegality; court's flexibility in s.994 cases. |
Used to reinforce the flexible, contextual nature of unfair prejudice. |
| Re Tobian Properties Ltd [2013] EWCA Civ 998 |
Court's approach where company is insolvent: petitioners must show shares would have had value but for wrongdoing; court must be flexible and may require a preliminary showing of real prospect before further hearings. |
Applied as guidance for the procedural approach: directing a preliminary hearing on the "real prospect" that profits existed and would have enhanced share value before ordering full account proceedings. |
| Re Tobian Properties Ltd [2012] EWCA Civ 998 |
As above (alternative citation appearing in the judgment). |
Reinforced the procedural approach and the requirement for a real prospect threshold in insolvent-company contexts. |
| JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176 |
Standard of appellate intervention for factual findings ("plainly wrong" test). |
Cited to explain when an appeal court will disturb factual conclusions (applied in rejecting grounds attacking factual findings absent plain error). |
Court's Reasoning and Analysis
The Court analysed the interplay between the profit/conflict rules, statutory duties (notably ss.172, 175 and s.170(2) CA 2006), the informal joint venture, and insolvency principles.
1) Profit/conflict rules: The Court adopted Recovery Partners GP Ltd v Rukhadze as the leading exposition: fiduciaries must account for profits made from, out of, or sufficiently connected with their fiduciary position, and that duty can extend to post-termination profits if the opportunity arose during the fiduciary relationship. The Court rejected the notion that a company's inability to exploit an opportunity (including insolvency) is a defence to liability to account for profits.
2) Effect of termination: The Judge had found the joint venture was mutually determined in July 2022 by conduct (withdrawal of funding and mutual unwillingness to work together). The Court analysed two distinct questions: (a) whether termination affected Mr Smith's fiduciary duties to the companies; and (b) whether any breach would amount to unfair prejudice to the Appellants as shareholders. The Court held that termination of the shareholders' joint venture did not absolve a director of duties owed to the companies, especially where companies were or may have been insolvent; duties to account remain those owed to the company (and, in insolvency, to creditors' interests).
3) Unfair prejudice analysis: Even if a fiduciary breach occurred, it does not automatically entail unfair prejudice. The Court explained that where one quasi-partner withdraws funding and effectively walks away, it is not necessarily unfair for the other to pursue future opportunities of the same kind for themselves; the dividing line is fact-sensitive.
4) Application to the two projects: The Court examined the facts as found by the Judge. For Holton Road, the property had been purchased by Company B before July 2022 and the potential for development was a maturing opportunity belonging to the Group; accordingly, Mr Smith's pursuit of the Holton Road contract through Company D could not be treated as a mere post-termination personal opportunity and, if profitable, should in principle be accounted for to the Group. For Albany Road, the property had not been an asset of the Group and Company E was incorporated later; the Court would not disturb the Judge's conclusion that Albany Road fell within permissible post-termination opportunities for the Respondents.
5) Insolvency and prejudice: The Court recognised that even if profits from Holton Road were recoverable, the Appellants would only be unfairly prejudiced if (i) the profits exceeded amounts owed to the Respondent on director loan accounts or (ii) the inclusion of those profits would have rendered the companies solvent so as to improve the Appellants' share value. The Judge's findings did not resolve whether Holton Road generated profits, whether those profits exceeded the Respondents' loan balances, or whether they would have restored solvency; therefore further factual inquiry is required.
6) Other grounds: The Court rejected challenges to the Judge's findings on unequal salary drawings (finding continued payments were not excessive given the Respondents' continued work after funding ceased) and found no basis to overturn the Judge's factual conclusions on company profitability in the absence of plain error.
7) Procedure going forward: Applying Re Tobian Properties, the Court directed a preliminary hearing to determine whether the Appellants have a real prospect of establishing that Holton Road generated profits, those profits exceeded the Respondents' loan account, and that inclusion of the profits would have enhanced the Appellants' share value; only if that hurdle is crossed should there be further full hearings. The Court invited submissions on whether that preliminary question should be remitted to the trial Judge or dealt with by the Court of Appeal and whether it can be dealt with on paper or require a short hearing.
Holding and Implications
APPEAL ALLOWED IN PART
Holding:
- The Court held that (a) a director cannot rely on the company's inability to exploit an opportunity (including insolvency or breakdown in cooperation) as a defence to the profit/conflict rules; (b) the Judge was entitled to find the joint venture had ended in July 2022; (c) Albany Road was a post-termination opportunity and not unfairly prejudicial for the Respondents to pursue; and (d) Holton Road was a maturing Group asset such that, if profitable and not accounted for, the Respondents would in principle have to account and this could amount to unfair prejudice.
- The Court dismissed Grounds 4 and 5 (remitted no further relief on unequal salary or challenged profitability findings) and limited the effect of its reversal on Ground 1 to the legal point that company inability is not a defence.
- The Court directed a preliminary "real prospect" hearing on the discrete factual questions listed in the judgment (existence and quantum of Holton Road profits; comparison with the Respondent's loan account; and whether inclusion of those profits would have produced a value in the Appellants' shares). The Court invited submissions from the parties on how that preliminary issue should be conducted.
Implications:
- Direct effect: The matter is remitted for further procedural steps limited to determining whether the Appellants have a real prospect of establishing the Holton Road profits and their effect on share value; only if that threshold is met will there be further substantive proceedings.
- No novel legal principle was created; the Court applied and clarified existing authorities (notably Rukhadze and Sequana) concerning the profit rule, post-termination profits, and the effect of insolvency on the assessment of unfair prejudice.