Guorui Song & Anor v Kes Smith & Ors [2026] EWCA Civ 719

[2026] EWCA Civ 719Case No CA-2025-001100
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Venue BUSINESS AND PROPERTY COURTS IN CARDIFF[2025] EWHC 949 (Ch)
INSOLVENCY AND COMPANIES COURT LIST (ChD)
His Honour Judge Jarman KC (sitting as a High Court Judge)
Civil Justice Centre
Venue Cardiff Civil and Family Justice Centre
2 Park Street
Venue Cardiff CF10 1ETDate 09/06/2026
Before
LADY JUSTICE WHIPPLELORD JUSTICE ZACAROLILADY JUSTICE COCKERILL
Between
MR GUORUI SONGPetitioners/MRS YALI ZHAOAppellants(1) MR KES SMITHRespondents(2) MRS EMMA SMITHRespondent(3) KESTRAL GROUP LIMITEDRespondent(4) KESTRAL CONSTRUCTION HOLTON ROAD LIMITEDRespondent(5) KESTRAL CONSTRUCTION (ALBANY ROAD) LIMITEDRespondent(6) KESTRAL CONSTRUCTION CARDIFF LIMITEDRespondent(7) KESTRAL HOLDINGS LIMITEDRespondent
Mr Ben Shaw KC and Mr Samuel Parsons (instructed by Huttons Law) for AppellantsMr James Pearce-Smith (instructed by Darwin Gray Solicitors) for RespondentsHearing Hearing dates: 12 & 13 May 2026
Approved JudgmentThis judgment was handed down remotely at 10.30am on 9 June 2026 by circulation to the parties or their representatives by e-mail and by release to the National Archives..............................

Introduction

[1]This appeal is mainly about what happens when two people who embarked together on a joint business venture, carried on via a corporate structure of a holding company and operating subsidiaries, fall out. Specifically, when one of them unilaterally withdraws their participation (in this case, their funding of the venture), is the other in breach of their fiduciary duties to the companies if they pursue opportunities of the same type as those undertaken by the joint business venture, without accounting to the companies for any profits made by them? And, if so, is that conduct which unfairly prejudices the other in their capacity as a member of the holding company?[2]It is an appeal from an order dated 1 May 2025 of HHJ Judge Jarman KC, sitting as a High Court Judge (the “Judge”), in which he dismissed the petition (the “Petition”) brought under s.994 of the Companies Act 2006 (“CA 2006”) by Mr Guorui Song (“Mr Song”) and his wife Mrs Yali Zhao (“Mrs Zhao”), together the “Petitioners”.[3]The first two respondents to the petition and to this appeal are Mr Kes Smith (“Mr Smith”) and his wife, Mrs Emma Smith (“Mrs Smith”). Although there are other respondents, only Mr and Mrs Smith have taken an active part. I will refer to them jointly as the “Respondents”.[4]The Petition is in respect of the company called Kestral Group Limited (“KGL”), the shares in which are divided equally between, on the one hand, the Petitioners and, on the other, the Respondents. Mr Song and Mr Smith each hold 40% of the shares, while their respective partners each hold 10%.[5]KGL is a holding company. It owns all the shares in two principal subsidiaries: SGR Estates Limited (“SGR”) and Kestral Construction Limited (“KCL”).[6]I will refer to KGL, SGR and KCL together as the “Group”. The Group’s business was the acquisition, development and sale of properties in and around Cardiff, Newport and Barry.[7]It is common ground that the Petitioners and Respondents operated the Group’s business pursuant to an informal joint venture agreement such that KGL may be characterised as a “quasi-partnership”. There is disagreement, however, over the terms of the joint venture.[8]There was also some disagreement as to when the joint venture commenced. The Judge held that it was unnecessary to determine the precise start date of the joint venture, on the basis that it was common ground that it was certainly in existence as at 31 August 2020, and nothing turned on whether or not it existed before that date.[9]It is also common ground that the relationship between Mr Song and Mr Smith had irretrievably broken down by July 2022. The main allegations in the Petition fell under two heads.[10]First, the Petitioners alleged that Mr Smith had, prior to the breakdown of their relationship, misappropriated several hundreds of thousands of pounds from the Group via various means. In addition to identifying numerous specific payments, or classes of payment, which were said to amount to misappropriations, the Petitioners asserted that Mr Smith had become suddenly and inexplicably wealthy, which indicated that he had been misappropriating the Group’s funds. It is fair to say that these allegations appear to have formed the centre of gravity of the trial. The Judge carefully considered and rejected all of these allegations, and there is no appeal from his conclusion on the specific payments or classes of payment, save in one respect relating to the drawing of salaries by the Respondents.[11]Second, the Petitioners alleged that Mr Smith had, after the breakdown of their relationship, diverted valuable business opportunities (consisting of refurbishment contracts for two buildings) to companies which he set up for that purpose. That was said to be a breach of Mr Smith’s fiduciary duties which has unfairly prejudiced the Petitioners. The Judge also rejected these allegations, and it is this part of his decision which is the focus of most of the appeal.

Background

[12]In order to understand and determine the issues that arise, it is necessary to explain the background in some detail. I take this largely from the Judge’s judgment.[13]Unfair prejudice petitions often give rise to a plethora of allegations and counter-allegations and generate much heat and animosity. This case is no exception. As the Judge noted at §4 of his judgment, he was required to disentangle the elements that needed to be decided from a great many factual issues explored in evidence, not all of which were pleaded, in circumstances where both men accused each other of dishonesty.

Pre-incorporation of KGL

[14]Mr Song and Mr Smith first met in about 2016. Mr Song had acquired a property and engaged KCL to convert it into flats. Mr Smith had worked as a builder since leaving school. KCL had been incorporated in 2013 with Mr Smith’s mother, Fatima Omar (“Mrs Omar”), as sole shareholder and director. Mr Smith explained in his witness statement that his mother took care of the administration side of the business.[15]Mr Song incorporated SGR in 2017. He (via SGR) and Mr Smith (via KCL) undertook further joint projects. In each case, the business model involved a clear divide between the responsibilities of the two men. Mr Song provided funding to SGR which purchased the property. The refurbishment works were subcontracted to KCL and managed by Mr Smith.[16]All of the projects (both before and after the incorporation of KGL), save one, were undertaken with housing associations, pursuant to which SGR would acquire a property (unless the property was already owned by the housing association) then sell it to, and enter into a refurbishment contract with, the housing association, subcontracting the construction work to KCL. The value in these projects lay predominantly in the construction contract. The housing association would typically pay monthly as the conversion works progressed.[17]The one exception was a property referred to as Barclays Court at Cathedral Road, Cardiff (“Cathedral Road”). SGR purchased this property in March 2019 for £1,650,000, engaged KCL to convert it into flats, and then sold off the flats (the last one being sold in June 2022).

The incorporation of KGL

[18]In the first half of 2019, Mr Smith and Mr Song had both become directors of KCL, and Mr Song acquired a 15% shareholding in KCL. Mr Smith took a similar shareholding in SGR. In June 2020 these shareholdings were increased to 50%. On 31 August 2020, KGL was incorporated with the Petitioners and Respondents becoming equal shareholders as I have described above. On 9 September 2020, Mr Song was appointed a director of KGL, and the shares in SGR and KCL were transferred to KGL. From at least this point, Mr Song and Mr Smith were directors of each of KGL, SGR and KCL.[19]The business model and division of responsibility that had existed up until then continued, however, after the incorporation of KGL. Funding continued to be provided by Mr Song, and he retained responsibility for funding arrangements. That was reflected in the fact that SGR maintained two bank accounts, one with Barclays Bank and one with Lloyds Bank. Income was paid into SGR’s Barclays Bank account, over which Mr Song had sole control. In contrast, both men had access to the Lloyds Bank accounts of each of SGR and KCL.[20]Equally, as before, Mr Smith retained responsibility for all of the construction work carried out through KCL.[21]The practical consequence of this was that Mr Smith and KCL were dependent on Mr Song advancing funds from SGR as and when money was needed for KCL to pay for ongoing construction work. Until about May 2022 that is what happened: Mr Song caused SGR to advance funds to KCL as and when requested by Mr Smith.

Funding

[22]There is a dispute between the parties as to whether it was a term of the joint venture that projects would be funded by Mr Song on an ongoing basis, or whether he agreed only to provide initial lending on the basis that it could be repaid and he would cease to provide any further funding once the business was self-financing. I return to this when considering the substantive grounds of appeal. For present purposes, I note the following points.[23]Mr Song provided funding primarily through loans to SGR, recorded in his directors’ loan account. By April 2021 he had loaned £1.9 million. That had reduced to just over £1.2 million as at 1 April 2022. He withdrew the whole amount standing to the credit of his loan account shortly afterwards: see §61 of the Judgment. The Judge found that a main, if not the prime, reason Mr Song withdrew his money was that he wanted to use it elsewhere, specifically to finance the purchase of a London home (Judgment, at §65). It is common ground that thereafter he refused to provide any further funding.[24]Once Mr Song withdrew his money, Mr Smith thereafter contributed the funding required for the continuing operations of the Group, using the turnover generated by the projects he took over as described in more detail below: see Judgment at §76. In May 2022, Mr Smith and his mother advanced funds to SGR to enable it to purchase a property at 81-85 Holton Road (“Holton Road”), although that was repaid soon afterwards. Thereafter, there was a substantial increase in activity on Mr Smith’s director’s loan account, with numerous debits and credits. According to the written record of the director’s loan account in evidence, although at one point in March 2023 the loan balance was reduced to almost nothing, thereafter debits far outweighed credits so that by the end of March 2024, Mr Smith was owed just over £1.1 million. The Judge found that this “serves to show the insolvent position of KCL as at July 2022” (see Judgment, at §70).

The breakdown in the relationship

[25]The breakdown in the parties’ relationship was acknowledged very quickly after Mr Song ceased to provide funding. Following a meeting on 4 July 2022, Mr Smith emailed the other shareholders on 7 July 2022 attaching heads of terms for three options, two of which related to the purchase of the Petitioners’ shares by the Respondents. The email suggested that there had already been agreement that these would be acquired for £200,000, although the email also made it clear that the heads of terms were subject to formal agreement and due diligence, and the Judge found that there had been no meeting of minds on this point.[26]The parties then instructed solicitors. Mr Song’s solicitors rejected the offer, and said that they intended to obtain a valuation of Mr Song’s interests and an audit. They expressed concern at the decrease in net assets of the Group despite the various projects having been profitable.[27]On 10 August 2022 Mr Smith’s solicitors wrote to Mr Song’s solicitors with a formal offer to acquire the Petitioners’ shares. They were given two options. The first was a repeat of the offer to sell their shares for a price of £200,000. The second was to sell their shares at a price equal to 50% of the valuation of the business to be undertaken by an independent accountant. This offer was described as the equivalent remedy which the Petitioners could expect in any unfair prejudice petition, and was in practical terms the equivalent of the audit which Mr Song’s solicitors had requested in their letter of 8 July 2022. It was made clear that the Respondents were not prepared to take on any new projects “under the current ownership structure” and that they intended to finish with the current sites, and wind down the activities of the Group in an orderly manner.[28]Neither of those options was acceptable to Mr Song. The Respondents’ solicitors obtained a valuation of the shares in SGR and KCL. These were provided on 24 August 2022, based on draft accounts for the year ended 31 March 2022. Each valuation was on a net asset basis.[29]The draft accounts for SGR indicated net assets (after estimated closure costs) of £420,000. Following adjustments, principally relating to cost overruns on one of the company’s outstanding projects at Bay Chambers, which was now projected to make a loss of £480,938, the net asset value was estimated to be £82,932 (giving a value per each of the 1000 shares of £82.93).[30]The draft accounts for KCL indicated net liabilities of £244,604, so that the shares had a nil value.[31]Mr Song remained dissatisfied, and was convinced that Mr Smith had misappropriated the Group’s assets on a large scale, leading to the numerous allegations in the Petition to which I have referred above, which the Judge rejected.[32]As at July 2022 there were three remaining ongoing but unfinished projects within the Group. It is common ground that Mr Smith (with the increasing involvement of Mrs Smith) caused KCL to pursue each of these. The first was the Bay Chambers project to which I have already referred. KCL completed this project, receiving over £1 million between 1 September 2022 and 8 December 2023. The second was Stow Hill in Newport. KCL nearly completed this, receiving approximately £2 million between November 2021 and August 2024, but it was ultimately taken over by others. The third was Haydock House in Barry. KCL completed this project, receiving approximately £2 million between October 2022 and April 2024.

The diversion of business

[33]The Respondents admit that they pursued, through new companies incorporated for that purpose, two other projects which involved entering, after the breakdown in relations between the parties, into contracts to refurbish two properties. They deny, however, that this constituted a breach of duty.[34]The first related to Holton Road. As I have noted above, this was purchased in May 2022 by SGR, predominantly with monies provided by Mr Smith and his mother. The purchase price was £350,000. SGR provided £85,000 and sourced the other money by way of a loan from Mr Smith of £65,000 and a loan from Mrs Omar of £200,000. These loans were repaid by SGR shortly afterwards from the proceeds of sale of one of the units in the Cathedral Road development. Holton Road was sold by SGR to Hafod Housing Association (“Hafod”) on 10 March 2023 for £549,100. On the same date, a building contract was entered into with Hafod by the fourth respondent, Kestral Construction Holton Road Limited (“KCHR”). KCHR had been incorporated on 30 September 2022. Mr and Mrs Smith each held 50% of its shares.[35]The second related to the conversion of a church at Albany Road, Cardiff (“Albany Road”) which was owned by Cadwyn Housing Association (“Cadwyn”). Mr Smith formed the fifth respondent, Kestral Construction (Albany Road) Limited (“KCAR”), on 8 February 2023. KCAR entered into a building contract with Cadwyn on 10 March 2023.[36]The Judge carefully addressed, and rejected, each of the allegations of misappropriation of funds in the period prior to the breakdown of the parties’ relationship at §27 to §49 of the Judgment.[37]The one matter of misappropriation which the Petitioners pursue on appeal is the allegation that the Respondents withdrew over £147,000 more salary than the Petitioners over the period March 2021 to March 2023, notwithstanding the fact that it was common ground that they had agreed that they would withdraw equal amounts. At §37 of the Judgment, the Judge recorded the Respondents’ case as being that until June 2022 the salaries (and other amounts) drawn by them were equal (notwithstanding that Mrs Smith worked in the business and Mrs Zhao did not) but that they did thereafter draw increased amounts by way of salary. The Petitioners received nothing thereafter, Mr Song having accepted in evidence that he no longer wished to work with Mr Smith. The Judge noted that as a result of the Respondents continuing to work after July 2022, KCL received substantial sums from the completion, or near completion, of the three projects referred to at §‎32 above.[38]At §38,

the Judge accepted the Respondents’ evidence that they worked hard on these projects and concluded:

“As Mr Song was no longer funding the projects and as he and Mrs Zhao were not providing any work in relation thereto, in my judgment the continued payments to Mr and Mrs Smith by way of salary were not excessive, let alone fraudulent.”
[39]The Petitioners claimed that the Respondents’ conduct in causing KCHR and KCAR to enter into development contracts for, respectively, Holton Road and Albany Road constituted a breach of fiduciary duty by Mr Smith.[40]The Judge addressed this at §75 to §83 of the Judgment. At §74, the Judge rejected the Respondents’ contention that it was a breach of the joint venture agreement for Mr Song to withdraw his director’s loan and refuse to provide funding. He continued, at §75 & 76:
“75. It is however likely that the withdrawal did impact upon the relationship of the men. They both accepted in oral evidence that in July 2022 they reached the position that neither wanted to work with the other again, and there is some indication of that in the contemporaneous documentation. In my judgment the appropriate analysis is that the joint venture agreement was mutually determined in July by words and/or conduct of the men. Mr Song was entitled to refuse further funding. 76. In my judgment Mr Smith complied with his duty to the Company by completing two of the existing contracts and nearly completing the third. I accept his evidence that he was able [to] do this with the turnover generating by the KCHR and KCAR contracts and by bank borrowing. As the joint venture agreement was at an end, in my judgment it was open to him to take on these contracts through these companies. It was not a diversion of SGR or KCL business as those companies were not in a position to take up such contracts as a result of the men not wanting to work with another again and/or because of the financial difficulties of those companies at the time. Nor was this a case of Mr Smith using knowledge, names, or any other assets of those companies in order to secure these contracts. Mr Smith, I accept, already had experience and knowledge relating to housing association contracts and was already using the name Kestral before the joint venture agreement and there is nothing to suggest that by words or conduct Mr Smith assigned this name for the exclusive use of the Company or KCL.”
[41]On that basis, he concluded (at §77) that none of the post-breakdown allegations were made out against Mr Smith “in terms of fraud, or breach of directors’ duties, or breach of the joint venture agreement.”[42]At §79 he said that even if Mr Smith was in breach of duty, “it does not automatically follow that that amounts to unfair prejudice”, citing O’Donnell v Shanahan [2009] EWCA Civ 751.[43]At §80 the Judge summarised the elements required to establish a claim of unfair prejudice (citing Hollington on Shareholder Rights, 10th ed. at §7-106). He noted as follows:
“There was no dispute before me as to the principles to be applied. These include that the concepts of unfairness and prejudice are relatively broad, but must be assessed judicially, prejudice and unfairness must be real and substantial, and context is important. Whether the value of a shareholding has been diminished by the conduct complained of is relevant to the question of whether there is real prejudice. The question of whether to grant relief and, if so, what relief to grant is a matter for the court’s discretion.”
[44]He then turned to the question of the Respondents’ offer to purchase the Petitioners’ shares. He cited from O’Neill v Phillips [1999] 1 WLR 1092, at p.1107C where Lord Hoffmann explained that in a case where a petitioner claimed they were unfairly prejudiced by being excluded from the business, the unfairness lay not in the exclusion, but in the exclusion without a reasonable offer to buy their shares. At §82, the Judge assessed the Respondents’ offer as reasonable so that “if there was exclusion, it was not without a reasonable offer”. This reference to exclusion was to the fact that one of Mr Song’s complaints had been that he was wrongly excluded from participating in the business, an allegation which the Judge rejected and in respect of which there is no appeal. The Judge concluded at §83:
“Accordingly, even if contrary to my findings, Mr Song was excluded, the offer made and rejected was a reasonable one and so there was no unfairness”
.

Grounds of appeal

[45]The Petitioners appealed, with permission granted by me on 21 July 2025, on five grounds. These are, in summary:(1) The Judge was wrong to conclude (at §76 to §79 of the Judgment) that Mr Smith had not breached his duties under ss.172 and 175 of CA 2006 by diverting business from SGR and KCL on the basis that those companies could not take up the business opportunities themselves, or on the basis that those companies were in financial difficulties.(2) The Judge was wrong to conclude (at §75 and §76 of the Judgment) that Mr Smith’s diversion of business opportunities from the companies was not unfairly prejudicial to the Petitioners because Mr Song and Mr Smith had mutually terminated their “joint venture agreement” in July 2022. The Petitioners contend that the Judge failed to recognise that the terms of the joint venture were governed exclusively by KGL’s constitution, and that this was not capable of being terminated by mutual consent.(3) The Judge was wrong to conclude that the Respondents’ offer to purchase the Petitioners’ shares could function as a ‘clean break’ between them and cure the unfair prejudice suffered by the Petitioners.(4) The Judge was wrong to conclude that the Petitioners had not suffered unfair prejudice by reason of Mr and Mrs Smith drawing £147,000 more in remuneration than the Petitioners received in the period March 2021 to March 2023. In so concluding, the Judge failed to apply the principle that acting in breach of the terms of the shareholders’ bargain is in itself capable of constituting unfair prejudice.(5) The Judge erred in fact in concluding that the companies were unprofitable, which was not a conclusion open to him in circumstances where, among other things, a document before the court showed that the Cathedral Road flats sold for a total of £5,649,500 and achieved a profit of £2,617,303.58. Further, the Judge erred in placing no, or no sufficient, weight on Mr and Mrs Smith’s unexplained and dramatic growth in wealth.[46]The Respondents have filed a Respondents’ Notice, seeking to uphold the Judge’s decision on the following alternative bases:(1) The Judge correctly found that the money generated by the pursuit of the projects in relation to Holton Road and Albany Road was used to enable KCL to complete, or attempt to complete, its existing three projects;(2) The Respondents did not make any profits from the diversion of the opportunities;(3) Even if the Respondents had made any profits from the diversion of the opportunities, they would have been used to pay the creditors of the Group and would not have enhanced the value of the Petitioners’ shares because the companies in the Group were insolvent; and(4) The Petitioners had used the funds which they withdrew from SGR to invest in a property in London and had not accounted to the Group for any profits generated by that investment.

The “profit rule”

[47]The rule that fiduciaries must not without their principal’s consent keep for themselves a profit from their position as such (the “profit rule”) and the related principle that fiduciaries must avoid placing themselves in a position where their interest and duty may conflict (the “conflict rule”) have a long antiquity. The relevant case law, extending back over 300 years to Keech v Sandford (1726) Sel Cas Ch 61, was explored by the Supreme Court (sitting as a panel of seven) in Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10; [2026] AC 209 (“Rukhadze”). It is unnecessary for the purposes of this case to look further than the judgment of Lord Briggs (with whom Lords Reed, Hodge and Richards agreed, being the majority) in that case.[48]The purpose of the rule, per Lord Briggs at §16, is “to protect or deter those who have undertaken an obligation of single-minded loyalty to someone else from being tempted by human frailty to fall short of that obligation”.[49]According to the majority, the rule requiring a fiduciary to account for profits is a rule governing the conduct of fiduciaries which exists in its own right, and not merely a remedy for breach of some other duty, as explained by Lord Briggs at §20:
“It is a duty or obligation imposed by equity on all fiduciaries, as an inherent aspect of their undertaking of single-minded loyalty to their principals. It is not just a discretionary equitable remedy for the breach of some other duty, such as the conflict rule, nor is it necessarily triggered by some other breach, although it very often is. A fiduciary may come to generate a profit out of his role as such without committing any breach of trust. It may be an authorised use of the trust property, or of his fiduciary powers. But he must then account for that profit if it has been made from or out of his fiduciary position, not keep it for himself. The wrong which may lead to a court order for an account of profits is, in such a case, no more or less than the failure to account itself, by a fiduciary who wishes to keep the profit for himself.”
[50]The Supreme Court in Rukhadze was invited to relax the strictness of the rule, on the grounds that among other things it was perceived to lead to extremely harsh results, but declined to do so (see Lord Briggs at §75):
“The rigour of the profit rule, together with the conflict rule to which it is closely related, continues to underpin adherence by fiduciaries to their undertaking of single-minded loyalty to their principals and beneficiaries, and the discretion to make allowance for their application of work, skill and risk in the taking of the account is a typically equitable answer to the occasional danger that the rigour of the rule will cause disproportionate injustice.”
[51]The rule does not necessarily preclude a director of a company making profits from a venture unconnected with his role as a fiduciary, as explained by Lord Briggs at §25:
“Undertaking the role of a fiduciary does not, of itself, prohibit the fiduciary from carrying on other profitable activities which have nothing to do with the subject matter of the fiduciary relationship. The director of a company making cars may perfectly legitimately carry on an activity of betting on horse races out of working hours, and keep any profits he makes for himself. But the opposite would be true of an executive director of a company operating a horse racing stable, if his betting was informed by what he learned while at work, unless the company gives its consent. Similarly (subject of course to any contractual restraint) the director of a company may, after resignation, set up and make profit from carrying on a similar business to that of the company, provided that he does not use information, or pursue opportunities that came to him, from his fiduciary position in the company.”
[52]The precise formulation of the degree of connection between a director’s fiduciary position and the profit made is difficult to pin down. As Lord Briggs noted at §26, different judges have used different phrases over the years (such as a profit made “by use of” a fiduciary position or “by reason of and in the course of that fiduciary relationship” or “benefits which he obtained in the course of and owing to his directorship”). Lord Briggs used the following formulation, at §25:
“The duty, which may well extend beyond the end of the fiduciary relationship, is to account for profits made from, out of, or otherwise sufficiently connected with, the fiduciary relationship.”
[53]What is clear is that it is no defence for a director to rely on any of the following, with reference to the relevant paragraph in Lord Briggs’ judgment:(1) The company would not have made the profit even if the director had not breached their fiduciary duty: §37, citing Industrial Developments Ltd v Cooley [1972] 1 WLR 443;(2) The company could not have taken up the opportunity from which the profit arose: §24, citing Keech v Sandford (above) and Regal Hastings Ltd v Gulliver [1967] 2 AC 134, per Lord Porter at p.159;(3) The director would have made the profit even if they had not committed any breach of duty: §5, §38 and §75 (rejecting the invitation to change the law in this respect);(4) The company, had its consent been sought, would have permitted the director to take up the opportunity from which the profit arose: §40, citing Boardman v Phipps [1967] 2 AC 46 per Lord Guest at p.117.[54]Moreover, the duty to account does not end on the termination of the fiduciary relationship. The director’s obligation to account applies to profits made from an opportunity exploited after the termination of the fiduciary duty where the opportunity arose prior to that termination and was sufficiently connected with the fiduciary relationship, as Lord Briggs explained at §4:
“Where profits are only made by the fiduciary after the fiduciary relationship has ended (“post-termination profits”), the fiduciary will still owe a duty to account if the profits have been derived from or made out of that former relationship. Typically the profits may be attributable to the development of an opportunity which the fiduciary learned about while performing his fiduciary role, or have been facilitated by the use of information which he received while acting in the same capacity.”
[55]He went on to point out that the outcome of disputes as to whether post-termination profits fall within the duty to account are often very fact-sensitive.[56]The conflict rule (expressed in a way that encompasses the profit rule) is codified by s.175 CA 2006:
“(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. (2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).”
[57]The continued application of the rule after a director leaves office is expressly provided for in s.170(2) CA 2006: “(2) A person who ceases to be a director continues to be subject—(a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and(b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director. To that extent those duties apply to a former director as to a director, subject to any necessary adaptations.” (a) to the duty in section 175 (duty to avoid conflicts of interest) as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director, and (b) to the duty in section 176 (duty not to accept benefits from third parties) as regards things done or omitted by him before he ceased to be a director.

Unfair prejudice

[58]Neither party took issue with the summary of the principles relating to unfair prejudice set out by the Judge at §80 of the Judgment (quoted above at §‎43).[59]Unfair prejudice is a broad and flexible concept, which frees the court from technical considerations of legal right, and confers a wide power to do what appears just and equitable, albeit it must be applied judicially and by reference to rational principles: O’Neill v Phillips [1999] 1 WLR 1092, per Lord Hoffmann at p.1098D-E. Lord Hoffmann went on to explain that the background to s.459 of the Companies Act 1985 (the predecessor to s.994 CA 2006) has the following features:
“First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law. The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.”
[60]The flexibility of the concept is reflected in the comments of Hoffmann LJ in Re Saul D Harrison & Sons plc [1994] BCC 475 at p.489D-F, first, that a finding that conduct was not in accordance with the articles does not necessarily mean that it was unfair, still less that the court will exercise its discretion to grant relief and, second, that conduct can be unfair without being unlawful. It is also reflected in the comments of Arden LJ in Re Tobian Properties Ltd [2013] EWCA Civ 998 at §44:
“We have seen that the content of fairness is contextual. It is also flexible and open-textured. It is capable of application to a large number of different situations. The courts are also given wide powers to fashion relief to meet the circumstances of a particular case. Parliament clearly intended the courts to adopt a flexible approach to proceedings under s.994, and to be flexible in the exercise of their powers in relation to these proceedings.”
[61]It was common ground between the parties on this appeal that the Petitioners were only entitled to any relief, including by way of an account, if they could establish that they had been unfairly prejudiced.[62]I turn to address the grounds of appeal.

Ground 1

[63]Ground 1 challenges the Judge’s conclusion that it was not a diversion of the business of KCL or SGR (and thus not a breach of fiduciary duty) for Mr Smith to cause KCHR and KCAR to enter into development contracts in respect of Holton Road or Albany Road, because KCL and SGR were not able to take up those opportunities, either because Mr Smith and Mr Song did not want to work together again, or because of those companies’ financial difficulties.[64]It would clearly be a breach of Mr Smith’s fiduciary duties owed to SGR and KCL to develop any opportunities that arose out of or were connected with his fiduciary relationship with those companies. If Holton Road and Albany Road were such opportunities then, leaving aside the question of whether the termination of the joint venture impacts on this (the subject matter of Ground 2), there was a breach. It is no answer that the opportunity could not have been exploited by the company itself. That is clear from the principles confirmed in Rukhadze set out above.[65]It makes no difference that it is the company’s insolvency that prevents it exploiting the opportunity. Where a company is insolvent or is bordering on insolvency the director’s duty to act in the interests of the company is modified from one that requires the interests of the members as a whole to be taken into account, to one that requires the interests of the creditors as a whole to be taken into account: BTI 2014 LLC v Sequana SA [2022] UKSC 25; [2024] AC 211 (“Sequana”). But the fact that the identity of those with the economic interest in the company’s assets has shifted from members to creditors clearly cannot affect the director’s responsibility to account to the company for profits made from, or out of, or sufficiently connected to his fiduciary obligations.[66]An important consequence of the company’s insolvency, however, is that the members no longer have the power to authorise or ratify conduct which would constitute a breach of the director’s duty to the company: see for example Sequana at §37 per Lord Reed. It may also be of significance when it comes to assessing whether a director’s breach of duty has unfairly prejudiced the company’s shareholders (a point I return to below).[67]Similarly, it makes no difference that the company’s inability to exploit the opportunity is due to the fact, without more, that Mr Song and Mr Smith could no longer work together.[68]Mr Pearce-Smith (who appeared for the Respondents) fairly and realistically accepted that the Judge was wrong in law insofar as he concluded that the inability of the companies to exploit the Holton Road and Albany Road projects was a defence to the claim for breach of fiduciary duty. He suggested, however, that the opportunity to pursue the two projects was not one which arose out of or was sufficiently connected with Mr Smith’s fiduciary duty to the company. I understood this submission to be made principally in the context of ground 2, namely that these two projects fell outside the scope of the joint venture because they were taken up after the joint venture had terminated. If and to the extent that Mr Pearce-Smith was making a different point, such as that the opportunities fell outside the scope of the Group’s business because the Holton Road and Albany Road projects were not opportunities of a type that the Group was concerned in (c.f. the example given by Lord Briggs in Rukhadze of the director of a car-making company betting on the horses in his spare time) then it is clearly wrong. Both projects involved the refurbishment of properties in the Cardiff and Barry area under a contract with one or other housing association with whom KCL was at the same time pursuing other projects.[69]The crux of the Respondents’ case, namely that Mr Smith was free to pursue the Holton Road and Albany Road projects because the joint venture had terminated, lies at the heart of ground 2. I address this below. First, however, I will address the discrete points raised by grounds 3 and 5.

Ground 3

[70]Ground 3 challenges the Judge’s conclusion that the Respondents’ offer to purchase the Petitioners’ shares was itself an answer to the allegations of unfair prejudice.[71]The Petitioners do not dispute that where unfair prejudice consists of exclusion of a petitioner from the company, that will not be unfairly prejudicial if it is accompanied by a reasonable offer to buy the petitioning members’ shares: see the passage from Lord Hoffmann’s speech in O’Neill v Phillips [1999] 1 WLR 1092 at p.1107 quoted by the Judge at §81.[72]While the Petitioners did allege exclusion in this case, that allegation failed and there is no appeal in respect of it. The claims relevant to this appeal are of misappropriation of assets and the wrongful diversion of business. In such cases, an offer to buy out the petitioner’s shares – whether at a certain price or at a price to be determined by an independent valuer – does not in itself counteract the unfair prejudice. That was the conclusion of the Court of Appeal in North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625. The allegations of unfair prejudice in that case related to the alleged misuse of the company’s assets. It was alleged that a separate business undertaken by the respondents should be held on a constructive trust for the company. The respondents had offered to purchase the petitioner’s shares at a value to be determined by an independent accountant. Aldous LJ, with whom Morritt LJ agreed, distinguished O’Neill v Phillips on the ground that where the value of the petitioner’s shares depends on a question such as whether or not a business constitutes trust property of the company, that decision should be taken by the court and not by an accountant: see p.637e-f.[73]In fact, the Judge’s conclusion on this point was confined to the Petitioners’ claim of exclusion. At §82, the Judge said that “if there was exclusion, it was not without a reasonable offer” and, at §83, he said “even if contrary to my findings, Mr Song was excluded, the offer made and rejected was a reasonable one and so there was no unfairness.” That conclusion is unimpeachable, but irrelevant on this appeal since the Judge’s finding that there was no exclusion is not appealed.[74]Had it been necessary to consider the Respondents’ broader point, that the offer to purchase the Petitioners’ shares at a price determined by an independent valuer was also an answer to the remaining allegations of unfair prejudice, then I would have rejected it, for the reasons given by Aldous LJ in North Holdings Ltd. Mr Pearce-Smith suggested that the reasoning in North Holdings Ltd did not apply here because, as at the date of the Respondents’ offer, there had been no diversion of business, and the offer included that there would be an independent audit of the Group’s dealings. I do not accept this for two reasons. First, the Petitioners’ other complaints, as to the misuse of the Group's assets, were equally of a kind that needed to be determined by a court, not an accountant. Second, the Judge’s findings included that Mr Smith was in discussion with Hafod in mid-July as to the redevelopment of Holton Road, so the question whether that was an opportunity that belonged to the Group was likely to form part of the analysis as to the value of the Petitioners’ shares.

Ground 5

[75]Ground 5 is a challenge to the Judge’s finding of fact that SGR and KCL were unprofitable. Mr Parsons, who argued this part of the case for the Petitioners, rightly accepted that an appeal court should only interfere with a judge’s findings of fact if they were “plainly wrong” in the sense explained by, for example, Leggatt LJ in JSC BTA Bank v Ablyazov [2018] EWCA Civ 1176 at §40 to §43.[76]Ground 5 has limited relevance to this appeal, given that the Judge’s findings that Mr Smith did not misappropriate the Group’s funds in the period prior to the breakdown of the parties’ relationship are (mostly) not appealed. It is said to be an implicit component of the Judge’s errors on ground 2 (relating to the termination of the joint venture) and ground 3 (relating to the offer). Specifically, it is said that the Judge was not entitled to reach the conclusion that SGR and KCL were unprofitable, given that there was a document before the court which showed that the Cathedral Road flats sold for a total of £5,649,500 and achieved a profit of £2,617,303.58.[77]The Judge found, at §17 of the Judgment, that the Cathedral Road project was not “significantly profitable”, albeit that it did allow Mr Song to repay part of his director’s loan. The principal document on which Mr Parsons relied is a spreadsheet showing the sale price of each of the 17 units within the Cathedral Road project, made over the period June 2021 to June 2022. The total sale proceeds were £5,649,500, of which £74,833.20 was paid in legal and estate agent fees, and £2,957,363 was repaid to the Development Bank of Wales, which had financed the project.[78]The Petitioners contend that this demonstrates that the Cathedral Road Project made a profit of somewhere in the region of £2.6 million (the precise figure is not entirely clear, and it may be slightly above or slightly below that figure, depending on how a column headed “DBW Exit Fee” is to be accommodated within the calculation).[79]The flaw in this contention is that nowhere on this spreadsheet is any account taken of the building costs incurred in the renovation of Cathedral Road. The Petitioners themselves, having added some text to the bottom of the spreadsheet, left a blank space after both “KCL costs” and “Net Profit”.[80]Mr Parsons relied on an agreement entered into between SGR and KCL dated 1 November 2019, for the renovation of Cathedral Road, which identified a contract sum of £2,048,964.00. As Mr Pearce-Smith pointed out, the “contract sum” also included “such other sum as becomes payable under this Contract”. He said (and this was not gainsaid by Mr Parsons) that this was not a contract between arms’ length parties, but was produced for the purpose of obtaining funding, and there was no evidence of KCL invoicing SGR pursuant to that contract. Moreover, it is common ground that the Covid pandemic had an inflationary impact on building costs (albeit the Petitioners do not accept that it was as great as the Respondents claimed), whereas this contract pre-dated the commencement of the pandemic and the building works continued into 2021.[81]Mr Parsons relied also on other documents, including an email from Diane White (the Group’s finance director) dated 9 December 2021 attaching a list of properties with a total estimated value of £29,250,688. The email referred to “equity of £2.9m in Kestral Mews” (another name for Cathedral Road). Mr Pearce-Smith submitted, and I agree, that the reference to “equity” in that email is not a reference to profit, but to the value of the property after deduction of bank borrowing. That is consistent with the spreadsheet referred to at §‎77 above. It says nothing about whether the projects were profitable.[82]In light of the above, in my judgment the documents to which we were taken by Mr Parsons fall short of showing that the Judge was not entitled to reach the conclusion he did that the Cathedral Road project was not significantly profitable.[83]The remaining matters relied on under ground 5 go to the Judge’s rejection of the Petitioners’ case that the Respondents could not explain their sudden increase in wealth. As I understood Mr Parsons’ submissions on this point, the Petitioners were concerned to ensure that, if the appeal is allowed on other grounds, the Petitioners should not be stuck with the Judge’s findings on these points in connection with any account that may be ordered against Mr Smith, but should be entitled to an account of the whole of the dealings of the Respondents in respect of the Group, both prior to and after the breakdown in their relationship.[84]I do not accept that it would be open to the Petitioners to obtain such relief, even if they are successful on other grounds of appeal. Aside from the question of the drawing of unequal salaries, which raises a discrete point, the remainder of the appeal is concerned with the Judge’s decision on the diversion of business opportunities after the breakdown in the parties’ relationship.[85]In effect, Mr Parsons’ submission is an attempt to re-open the Judge’s rejection of the Petitioners’ case that the Respondents were guilty of wholesale misapplication of the Group’s assets prior to the breakdown in their relationship. The problem with this is that the Petitioners had their opportunity to advance a claim that the Respondents had misapplied the Group’s assets, and took it by alleging that numerous categories of payments, by reference to the companies’ bank statements, were improper.[86]The argument that the Respondents came into unexpected wealth was essentially an effort to bolster (by inference) the specific allegations that the various categories of payments did indeed constitute misappropriations of the Group’s assets.[87]Having lost on each of those specific allegations, and there being no appeal against all but one of the Judge’s findings, it is not open to the Petitioners to revisit this issue by obtaining an account of all the Respondents’ dealings with the Group via an attack on the Judge’s rejection of the Petitioners’ efforts to show that the Respondents had not adequately justified their increase in wealth. This would be, in my view, an impermissible attempt to challenge by a side-door the Judge's primary conclusions of fact in relation to each of the categories of impugned payments.

Ground 2

[88]Ground 2 focuses on the Judge’s findings, at §76, §77 and §79 of the Judgment, that Mr Smith’s conduct post-breakdown did not constitute a breach of fiduciary duty because “the joint venture agreement was mutually determined in July [2022] by words and/or conduct of the men”, and it was thus open to Mr Smith to take on the contracts in relation to Holton Road and Albany Road through his own companies.[89]It is first important to identify precisely the findings made by the Judge as to what is meant by the joint venture having been “mutually determined”. There are two possibilities: it came to an end pursuant to its own terms or, irrespective of its terms, the parties reached agreement in July 2022 to terminate it.[90]The latter is not a realistic interpretation of the Judge’s finding. The most that can be said is that Mr Song and Mr Smith were of the same mind that they would not work together again. No agreement was reached, however, about how a parting of the ways might be achieved. The Respondents’ offers to buy the Petitioners’ shares were rejected. Nothing was done to terminate the companies. KCL and SGR continued trading, in order to complete the three projects then under way, albeit only the Respondents continued to do any work in the business. The share structure remained the same. Neither Mr Song nor Mr Smith has ever resigned or been removed as a director of any of the companies. SGR was eventually wound up in December 2024. According to the publicly available records at Companies House, KGL is only now in the process of being struck off. KCL still exists and is yet to enter any formal insolvency process. Beyond that, it is not suggested that there was any agreement reached about the Group’s remaining projects, or as to whether either of the men was free to undertake new projects. Nor is it suggested that Mr Song acquiesced in Mr Smith’s conduct.[91]That leaves the possibility that the joint venture had come to an end according to its own terms. It is common ground that there was never – whether in the summer of 2020 or otherwise – a formal agreement setting out the terms of the joint venture. There was no term agreed, for example, expressing how long the joint venture should last, how or when it could be terminated, or what was to happen to disentangle the parties’ relationship if it was terminated. The only formal step taken was the creation of the Group, via the incorporation of KGL, the appointment of Mr Song and Mr Smith as directors of each of the companies in the Group, and the transfer to KGL of the shares in KCL and SGR.[92]The parties agreed that the joint venture included the term that they would draw equal salaries: see §37 of the Judgment. The only other express findings in the Judgment as to the terms of the joint venture relate to Mr Song’s funding obligations. The Respondents had pleaded (at §14 of the points of defence) that it was a term of the joint venture that Mr Song would provide the funds needed for any project which was the subject of the joint venture, and that he would not require repayment of the funds which he had provided “until the project had been completed”. On that basis, the withdrawal of his funds brought the joint venture to an end (see §2.3 of the points of defence). The Respondents also pleaded (at various places in the points of defence: see for example, §62.4 and §80.3) that – among other things – Mr Song’s action in withdrawing his funding was a breach by him of the joint venture agreement.[93]The Petitioners denied this. They accepted that Mr Song would control the finances of the venture and that all income would be paid into SGR’s account with Barclays Bank over which Mr Song had sole control (see §24(4) of the Amended Petition), but Mr Shaw KC (who appeared with Mr Parsons for the Petitioners) submitted that while Mr Song provided all the funding at the outset, this was in the nature of “seed capital” with the intention that the business would in due course become self-funding.[94]At §74 the Judge addressed, and rejected, the Respondents’ claim that Mr Song was contractually bound to keep on funding the projects, noting that there was nothing in writing to the effect that Mr Song was committed to do this and that such an open-ended commitment would be very onerous to him.[95]The fact that Mr Song was not contractually obliged to fund all the Group’s projects does not, however, answer the Respondents’ contention that the basis of the joint venture was that it would only pursue projects for so long as Mr Song funded them, such that it would come to an end when Mr Song’s funding was withdrawn. If that was the basis on which the joint venture was agreed to operate, then it is not difficult to infer that, although Mr Song’s withdrawal of his director’s loan and his refusal to fund any further projects was not a breach of the joint venture agreement, it nevertheless brought the joint venture to an end.[96]That, in my judgment, is the effect of the Judge’s finding at §75 that, although Mr Song was entitled to withdraw his funding, it had the consequence of mutually determining the joint venture agreement, read in the context of the Judgment as a whole, in particular §65, where the Judge found it was likely that Mr Song’s withdrawal of funding – contrary to his assertion that the business was by now self-funding – did have a significant impact on the funding of the projects, and his findings at §23 as to the poor financial condition of KCL.[97]It is, next, important to identify the legal consequences of the Judge’s finding that the joint venture had terminated. Mr Shaw submitted that it has no legal consequence either as regards the contention that Mr Smith was in breach of fiduciary duty or, if he was, the contention that the Petitioners were thereby unfairly prejudiced. That is because: the joint venture was implemented through the incorporation of KGL and the transfer to it of the shares in SGR and KCL; the determination of the relationship of joint venture between Mr Song and Mr Smith had no impact on the continuation of the companies, or on the continuation of the fiduciary duties owed by Mr Smith, as director, to the companies in the Group; Mr Smith’s only options if he wanted to be freed from these obligations were to liquidate the companies or to purchase Mr Song’s shares; and in the absence of either of these things, Mr Smith remained bound by his general duties as director, which he has breached with the result that a finding of unfair prejudice is inevitable.[98]It is necessary to distinguish two issues: first, the effect of the termination of the joint venture on Mr Smith’s fiduciary duties and, second, even if Mr Smith breached his fiduciary duties, did that unfairly prejudice the Petitioners?[99]Mr Shaw’s submissions have considerable force in relation to the first question, but less as regards the second.

Termination of the joint venture and Mr Smith’s fiduciary duties

[100]It is difficult to see how the fact that the Group was formed pursuant to a joint venture that was intended to continue only for so long as Mr Song’s participation continued impacts on the nature and content of Mr Smith’s fiduciary duties owed to the companies in the Group. As Mr Shaw pointed out, this case does not concern opportunities exploited after a director ceases to be subject to fiduciary duties to the company. Mr Smith continued to act as a director of the Group companies at the same time as he was exploiting for his own benefit opportunities of the same kind that the Group was formed to exploit. It is common ground that, in relation to the three projects which Mr Smith caused KCL to complete (or nearly complete), he continued to owe fiduciary duties to KCL. The Judge found (at §76) that he acted in accordance with those duties by seeking to complete those projects.[101]On the Respondents’ case that the Group was insolvent in July 2022, I have little doubt that the termination of the joint venture between the shareholders had no impact on Mr Smith’s fiduciary duties owed to the Group companies. If a company is insolvent, or bordering on insolvency in the sense explained in Sequana, then as I have already observed (see §‎65 above) its directors are required to act in the best interests of the creditors as a whole. In that context, the fact that the shareholders’ relationship of quasi-partnership has terminated, so that as between them they are content for any further projects to be undertaken by one or other of them for themselves, is irrelevant (in the same way that it would be irrelevant if the shareholders purported to ratify any breach of duty by the directors). The interests of the creditors as a whole lie in maximising the value of the company’s assets so as to enable the payment of their debts. Accordingly, the termination of the joint venture between the shareholders is not an answer to the company’s claim to recover the profits made in respect of the Holton Road and Albany Road projects.[102]I understood Mr Pearce-Smith to accept that proposition, to the extent that if the claim that Mr Smith should account for the profits of the Holton Road and Albany Road projects was here being brought by a liquidator of KCL or SGR, then the termination of the joint venture between the shareholders would not be an answer to that claim.[103]He submitted, however, that the position is different if the claim for breach of duty arises in the context of an unfair prejudice claim brought by a shareholder. I do not accept that proposition, at least formulated in that way. In determining whether a director is in breach of duty to the company, it matters not whether that arises in the context of a claim by the company, its liquidator, or an unfair prejudice petition.[104]I do accept, however, that the insolvency of the company is a relevant factor in answering the second question as to whether a shareholder has suffered any unfair prejudice by reason of a director’s breach of duty. I turn to the question of unfair prejudice.

Termination of the joint venture and unfair prejudice

[105]Where I part company with Mr Shaw’s arguments summarised at §‎97 above is with the proposition that if the failure to account to the companies for the profits of the two ventures was a breach of fiduciary duty, a finding of unfair prejudice inevitably follows.[106]The mere fact that the joint venture has terminated, so there will be no further projects undertaken between the quasi-partners, of course does not entitle one of them to assume for himself any part of the assets or business of the Group. That could only be achieved by agreement or by a liquidation of the companies in the Group. But it does not follow that it will be unfairly prejudicial to one of the quasi-partners if the other pursues opportunities that could have, but had not so far, been taken up by the Group.[107]If quasi-partners pursue a joint venture through the incorporation of a company, for the purpose of undertaking building projects on the basis that one will provide funding and the other will undertake the building works, then if the first withdraws their funding and refuses to cooperate with the other any more, I consider that in principle it is not unfairly prejudicial to them if the other pursues for themselves future projects which, had the joint venture continued, would have fallen within the scope of the joint venture. The partner who has unilaterally walked away, withdrawing what they invested, can hardly complain of unfairness when the other pursues for their own account opportunities which would, had the quasi-partnership continued, have been within its scope.[108]Identifying where, in any given case, the dividing line lies between the alternatives identified in the preceding two paragraphs is fact sensitive and not necessarily straightforward.[109]The Judge did not expressly answer the question whether, on the assumption Mr Smith was in breach of duty, the Petitioners were nevertheless not unfairly prejudiced. He did point out, at §79, that, even if Mr Smith was in breach of fiduciary duty, that did not automatically give rise to unfair prejudice, citing O’Donnell v Shanahan [2009] EWCA Civ 751. The only finding he went on to make as to unfair prejudice, however, was at §82 to §83, and this related solely to the allegation that Mr Song was excluded from the business. He there found (as I have observed above under ground 3) that, had Mr Song been excluded, the Petitioners’ offer to purchase his shares would have removed any unfair prejudice.[110]Nevertheless, reading this passage of the judgment as a whole, although the Judge did not analyse it in the way I have in the above paragraphs, I think it is implicit in the Judge’s conclusion, that the assumption by Mr Smith of the Holton Road and Albany Road projects was not a breach of the joint venture agreement, that it was not, for that reason, unfairly prejudicial to the Petitioners.[111]The question remains whether he was right to do so, in light of the distinction I have drawn at §‎106 to §‎107 above.[112]In my judgment, so far as Holton Road is concerned, the Judge was wrong to conclude that Mr Smith was free to pursue the project for himself. As I have already noted, the property was purchased by SGR before the breakdown in the parties’ relationship. While it was initially funded with borrowing from Mr Smith and his mother, that was soon repaid by SGR from its own assets (proceeds of the Cathedral Road development). The potential for developing Holton Road was one which the Group had been contemplating from as early as December 2021. The Judge found that Mr Smith was in discussions during July 2022 with Hafod about both Holton Road and Haydock House, a property in the same street, the refurbishment of which was one of the projects continued by KCL itself (see §68 and §71 of the Judgment). It was the Respondents’ case (at §14.3 of the amended points of defence) that Mr Song’s funding related to the acquisition of each property, whereas build costs would be paid by the housing association with whom KCL contracted. Holton Road was thus an actual asset of SGR before the joint venture was terminated. The opportunity to profit from it lay in a potential sale and/or refurbishment contract. The subsequent sale proceeds were retained by the Group, but the benefit of the refurbishment contract went to the Respondents via KCHR.[113]In light of these facts, which were either found by the Judge or which are not in dispute, it is impossible in my view to regard the Holton Road project as a mere future opportunity, of the kind which the termination of the joint venture meant could be assumed by Mr Smith for his own account. It was an existing asset of the Group, the exploitation of the profit from which was a maturing opportunity which fell on the same side of the line as the other three projects which Mr Smith caused KCL itself to complete, in respect of which it cannot be disputed that he continued to owe fiduciary duties to the Group companies.[114]The position is different in relation to Albany Road. The uncontroversial facts are that the property itself was not, and never became, an asset of the Group, KCAR was only incorporated in February 2023, and it entered into a contract with Cadwyn in March 2023. The most that can be said, by reference to a document from December 2021 which may or may not have included Albany Road within the reference to “churches” then under discussion, and some cross-examination of Mr Smith on that question, is that Albany Road may have been on the Group’s radar as a potential future project. The only other finding made by the Judge in relation to it is at §69, where he rejected Mr Smith’s evidence that the construction project had been put out to tender. That is of no relevance to the question as to its status in July 2022. Accordingly, I would not disturb the Judge’s conclusion in relation to the Albany Road project.

The Respondents’ Notice

[115]One of the points raised by the Respondents’ Notice relates to the impact of insolvency on the issue of unfair prejudice. The Respondents contend that even if the diversion of the opportunities in respect of Holton Road and Albany Road generated any profits for which the Respondents were liable to account to the Group, such profits would have been used to pay creditors and would not have enhanced the value of the Petitioners’ shares. Given my conclusion in relation to Albany Road, I deal with this and the remaining Respondents’ Notice points in relation to Holton Road alone.[116]A similar point arose in Re Tobian Properties Ltd [2012] EWCA Civ 998. A minority shareholder claimed that the majority shareholder had unfairly prejudiced him by drawing excessive remuneration from the company. Arden LJ, at §11 of a judgment with which Aikens LJ and Kitchen LJ agreed, said:
“Shares in an insolvent company in liquidation are clearly valueless unless the value of any claims which the company has against the respondents to the petition will eliminate the deficiency and produce a surplus for members. Section 994 of the Companies Act 2006 requires the petitioner to show that the respondent’s wrongful acts have caused him prejudice in his capacity as a member. If the company is insolvent, that means that – in general – the petitioner must show that his shares would have had a value but for the wrongdoing of the respondents.”
[117]Arden LJ went on at §12 to explain the caveat implicit in the phrase “in general”, namely that courts take a wide view of prejudice suffered by a petitioner, and the insolvency of the company may not exclude them being prejudiced in their capacity as a member otherwise than through the impact on the financial value of their shares. In this case, however, (aside from the exclusion claim, which is not relevant on this appeal) the only prejudice relied on relates to the financial interests of the Petitioners as members.[118]Accordingly, I accept that if, despite the repatriation of any profits wrongfully made by Mr Smith from the Holton Road project, the Group would have been insolvent, then the Petitioners would not have been unfairly prejudiced by Mr Smith’s conduct.[119]This is a point, however, where (because of the rather different issues in focus at the trial, and the subsidiary status of the diversion arguments at that time) the necessary findings have not been made in order for us to reach a conclusion on it. The Judge made reference to the fact that KCL was, in August 2022, estimated to be insolvent with net liabilities of £244,604, and to the fact that two years later KCL was indebted to Mr Smith for over £1 million, which served to show that it had been insolvent in July 2022. I note that the August 2022 valuation was on the basis of draft accounts for the year-ending 31 March 2022, but that in the final accounts for the same period KCL was said to have net assets of £111,631. The Judge made no finding as to the solvency of SGR in July 2022, referring only to the fact that SGR was estimated in August 2022 to have a net asset value of £83,000. There is no finding as to the profits if any generated by the Holton Road project. Accordingly, there is no finding as to whether, if the value of that opportunity was included within the Group’s assets in July 2022, or if the profits were ultimately received by the Group, the shares in KGL would still have been valueless.[120]Arden LJ pointed out in Re Tobian Properties, at §45, that it is not the function of the court at the liability stage of an unfair prejudice petition to determine the value of whichever shares are to be bought out. The court would not ordinarily, therefore, embark on quantifying the amount of (in that case) excess remuneration. That would generally be so if the company is solvent. Where, however, the company is insolvent then the court has to be flexible in its approach, because the Petitioner may not be entitled to any relief. She concluded (at §46 to §47) that the court “has to do what is necessary in that situation to achieve a just and fair result”. That meant, on the facts of that case, that the court should consider whether enough had been shown to justify a further hearing, and that was to be determined by asking whether there was a real prospect of the Petitioners establishing that the claim based on excessive remuneration would lead to the grant of relief. In the present case, the relevant questions would be whether the Petitioners can show that profits were made from the Holton Road project and, if those were brought into account, that the Petitioners’ shares in KGL would have a value. I return to this question when considering next steps in the concluding section of this judgment.[121]The Respondents further contend that the Judge’s decision should be upheld on the basis that he correctly found that income generated by the pursuit of the Holton Road project was used to enable KCL to complete its own outstanding projects. I accept that this is a relevant factor in determining whether the Petitioners can establish unfair prejudice. The income generated by the project was credited to Mr Smith’s director’s loan account. Assuming that the project generated profits, I cannot see how the Petitioners could claim that they had been unfairly prejudiced by Mr Smith retaining those profits for himself if they were in a sum equal to or less than the outstanding amount of Mr Smith's director's loan account with KCL. The one would offset the other.[122]The Respondents also contend that there was no unfair prejudice because no profits were in fact generated by the Holton Road project. I accept that, if there were in fact no profits, then that would be an answer to the allegation of unfair prejudice in this case. Again, however, there are no findings in the Judgment as to whether the project was profitable.[123]Mr Pearce-Smith points to matters which, on their face, provide compelling support for the conclusion that there were no profits, in respect of either of the two projects. KCHR was placed into creditors’ voluntary liquidation in March 2026, and the statement of affairs prepared by the directors indicates a deficiency in assets against liabilities in excess of £270,000. (KCAR was placed into creditors’ voluntary liquidation in February 2025, and the statement of affairs indicates a deficiency of over £1 million.)[124]Although these points are indeed compelling, along with the outstanding amount on Mr Smith’s loan account with KCL, they are not conclusive. As Mr Shaw submitted, without an account of the income and expenditure in relation to Holton Road, the fact that KCHR ultimately went into insolvent liquidation proves nothing. It does not rule out the possibility that the project was profitable, but the profits have gone elsewhere. We do not have sufficient information to make findings ourselves on this issue.[125]The final point raised in the Respondents’ Notice is that the Petitioners have themselves failed to account for any profits generated by the investment made by them with the money they withdrew from SGR. This point fails for at least two reasons. First, the Judge found that the moneys withdrawn by Mr Song were the repayment of his loan account, and that this was permitted by the terms of the joint venture. What Mr Song chose to do with his own money is irrelevant. Second, the Judge found that the money was used to buy a home in London (see, for example, §65 of the Judgment). That cannot conceivably be characterised as an investment in an opportunity that arose from or was connected with Mr Song’s fiduciary relationship with any of the Group companies.

Ground 4

[126]Under this ground, the Petitioners challenge the Judge’s conclusion in relation to the admitted withdrawal by the Respondents of unequal salaries.[127]The Petitioners alleged that Mr and Mrs Smith received £147,000 more in salaries than Mr Song and Ms Zhao between March 2021 and March 2023. Mr Pearce-Smith showed us, by reference to KCL’s bank statements, that until the breakdown in relations, the Petitioners and the Respondents received equal salaries, and it was only thereafter that the Respondents received increased amounts, whereas the payments of salary to the Petitioners ceased. We were told that this followed a board meeting of KCL, which neither Mr Song nor Mrs Zhao chose to attend, at which the increase in salaries was approved. Mr Shaw accepted that under the company’s articles, salaries were a matter to be determined by the board.[128]I have set out the Judge’s findings on this issue at §‎37 and §‎38 above. The Petitioners contend that the Judge’s conclusion – that the continued payment of salaries was neither excessive nor fraudulent – misses the point, because the Petitioners’ complaint was that the unfair prejudice arose from the fact that the Petitioners’ conduct was a breach of the terms of the joint venture agreement, under which the parties had agreed to draw equal salaries. They rely on the principle that unfair prejudice can result from a breach of the terms on which it was agreed the affairs of the company would be conducted: see O’Neill v Phillips (above) per Lord Hoffmann at p.1098H to p.1099A.[129]The Respondents’ answer to this is similar to their response under ground 2, namely that the joint venture came to an end on Mr Song withdrawing his director’s loan, and refusing to fund any further projects. They contend that, if nothing else, the facts that the Petitioners ceased to play any part in the business and the Respondents thereafter worked to ensure the completion of the Group’s outstanding projects brought to an end the understanding or agreement that they would draw equal salaries.[130]Mr Shaw submitted that there were three problems with that. The first was that the increase in salaries required approval of the board of KGL. In reply, however, Mr Shaw accepted that salaries paid by KCL were within the remit of its board of directors. The Judge’s unchallenged findings that the salaries were not excessive means that there is no question that there was any breach of duty by Mr Smith in causing the increased salaries to be paid.[131]The second point relied on by Mr Shaw is that the termination of the joint venture could not justify unequal drawings prior to that. Although the Judge recorded the Respondents’ submission that the increased salaries only commenced after July 2022, he did not reach any express finding on this. Nevertheless, as I have noted above, Mr Pearce-Smith showed us that KCL’s bank statements are clear on the point, and there was no answer to that point in the Petitioners’ reply.[132]The third point is that Mr Song never authorised Mr Smith to receive an increased salary and this was not implicit in the breakdown of their relationship. Although the Judge expressed his conclusion in terms of the salaries not being excessive or fraudulent, his findings here (the Petitioners were no longer funding or providing any work in relation to the business of the Group) and elsewhere (that the joint venture came to an end in about July 2022) equally justify the legal conclusion that there was nothing unfairly prejudicial in the payment of increased salaries to the Respondents. That, in my judgment, is a conclusion which rightly follows from those findings. Accordingly, I accept the Respondents’ submissions (see §‎129 above) on this point.

Conclusion

[133]For the above reasons, I conclude as follows.[134]As to ground 1, the Judge was wrong to rely on the fact that the Group companies could not themselves take up the business opportunities in respect of the Holton Road and Albany Road projects as an answer to the claim that Mr Smith should account to the Group for any profits made from those projects. By itself that conclusion is not determinative of the outcome of the appeal.[135]I do not think it is necessary to make any order on ground 3, because the Petitioners’ contention that the Judge was wrong in law to conclude that the Respondents’ offer to purchase the Petitioners’ shares could function as a “clean break” is misplaced, as the Judge did not reach that conclusion. The Judge concluded only that the share purchase offer would have been an answer to the contention that the exclusion of Mr Song amounted to unfair prejudice, which was not a matter pursued on appeal.[136]I would dismiss grounds 4 and 5.[137]As to ground 2 and the points in the Respondents’ Notice that go with it:(1) The Judge was entitled to conclude that the joint venture was at an end in July 2022;(2) That had the consequence that the Petitioners were not unfairly prejudiced if Mr Smith pursued future opportunities to acquire and/or refurbish properties, including by contracting with housing authorities for that purpose, even though these would have fallen within the scope of the Group’s business prior to the termination of the joint venture. The Albany Road project fell into this category;(3) The pursuit by Mr Smith of the Holton Road project was not, however, a future opportunity of that kind. It was an opportunity that had already matured. It belonged to the company so that, if it was profitable, the failure to account for those profits would in principle have unfairly prejudiced the Petitioners;(4) That would not, however, have caused the Petitioners to be unfairly prejudiced if either the amount of the profits was equal to or less than the amount of Mr Smith’s outstanding loan to KCL, or if SGR and KCL would – even with the benefit of those profits – have been insolvent, such that there would be no value in the Petitioners’ shares in KGL.[138]The following questions remain outstanding:(1) Whether the Holton Road project generated any profits and, if so, in what amount;(2) Whether those profits were greater than the amount outstanding to Mr Smith on his director’s loan account with KCL;(3) Whether, if the Holton Road project generated profits, and had those profits been paid to KCL and/or SGR, those companies would have been rendered solvent so as to enhance the value of the Petitioners’ shares in KGL.[139]The question arises as to how best to resolve matters going forward. I am conscious that the parties have already spent considerable time and money on reaching this point, and that if at all possible they should be encouraged to resolve the remaining differences as quickly and cheaply as possible.[140]The Petitioners failed to establish any of the allegations of misappropriation of the Group’s assets prior to the breakdown in the parties’ relationship. While their arguments have prevailed on some issues raised by this appeal, that may yet turn out to be a wholly pyrrhic victory if they fail on the questions left over from this judgment.[141]In these circumstances, the pragmatic approach taken by the Court of Appeal in Re Tobian Properties (above) is apposite, namely that the parties should only be put to the cost and expense of a further hearing to determine the outstanding issues if the Petitioners can first establish a real prospect that Mr Smith’s conduct actually caused them unfair prejudice. Specifically, consideration should first be given to whether the Petitioners can show that they have a real prospect of establishing that:(1) the Holton Road project generated profits;(2) those profits exceeded the amount that remains outstanding on Mr Smith’s loan account with KCL; and(3) had those profits been paid to KCL, that would have led to an enhancement in the value of the Petitioners’ shares in KGL.[142]I would therefore direct in the first instance a hearing to determine the real prospect of success point. If the Petitioners can overcome that hurdle, then the matter would proceed to a full hearing or hearings (it being a case management issue for the Judge how best, and in what order, to resolve the outstanding issues). The final issue is whether it would be better that the “real prospect” question be remitted to the Judge, or dealt with by us and, if so, whether that can be undertaken on the papers only, or with the benefit of a further short hearing. I would invite submissions from the parties on that question.[143]I agree.[144]I also agree.

Cited in 1 later judgment