This is not a love song: Song & Zhao v Smith & Others

The recent Court of Appeal decision in Song & Zhao v Smith & Others [2026] EWCA Civ 719, provides some useful reminders about the interplay between alleged breaches of director’s duties, insolvency and the unfair prejudice remedy.
 

The Facts
 

In August 2020, Mr Song and Mr Smith formalised a joint venture to develop residential properties via a company called Kestral Group Limited (“KGL”), of which they were both directors. Shares in KGL were divided equally between Mr Song and his wife, and Mr Smith and his wife. KGL had two principal subsidiaries: SGR Estates Limited (“SGR”) – which had previously been owned and controlled by Mr Song; and Kestral Construction Limited (“KCL”) – which had previously been owned and controlled by Mr Smith and his family. Mr Song provided funding to SGR which purchased the properties. The refurbishment works were subcontracted to KCL and managed by Mr Smith.

In or around April 2022, Mr Song withdrew funding from SGR and refused to provide any further funding, and the relationship between the parties irretrievably broke down by July 2022. Possible resolutions were discussed (including a buyout offer from Mr Smith to Mr Song) to no avail, and both parties remained shareholders and directors of KGL.  

In the meantime, Mr Smith took over the funding required for the continuing operations of the group – KCL and SGL both being in financial difficulty - using turnover generated by the projects. This included turnover generated by two ‘new’ projects (“Albany Road” and “Holton Road”), which Mr Smith took on in March 2023 via newly incorporated companies owned solely by him and his wife. In addition, after April 2022, Mr Smith and his wife paid themselves increased salaries from KCL, and salary payments to Mr Song and his wife were stopped.

In their unfair prejudice petition, Mr Song and his wife alleged (amongst other things), in respect of Albany Road and Holton Road, that Mr Smith had diverted these opportunities from KGL in breach of his fiduciary duties; and that the payment by KCL of increased salaries to Mr Smith and his wife was both a breach of the joint venture agreement (pursuant to which they were to receive equal salaries) and, further, a misappropriation of the joint venture’s assets.

The petition was heard at first instance by His Honour Judge Jarman KC, who largely dismissed the petition. In particular, the Judge considered that the increased salary payments were duly authorised by the board of KCL and not excessive; and because the joint venture was at an end, and KCL and SGL were not financially able to pursue the Albany Road and Holton Road projects, Mr Smith had been entitled to pursue those projects outside of KGL.

The Appeal
 

Mr Song and his wife appealed on five grounds. They contended that the Judge had been wrong:

(1) To conclude that Mr Smith had not breached his director’s duties by diverting business on the basis that the KGL companies could not take up the opportunities;

(2) To conclude that Mr Smith’s diversion of business opportunities was not unfairly prejudicial because the joint venture agreement had terminated in July 2022 before commencement of the Albany Road and Holton Road projects;

(3) To conclude that the Smiths’ offer to purchase the Petitioners’ shares could cure the unfair prejudice suffered by the Petitioners;

(4) To conclude that the Petitioners had not suffered unfair prejudice by reason of Mr and Mrs Smith drawing £147,000 more in remuneration, and the Judge failed to recognise that breaching the terms of the shareholders’ bargain was itself unfair prejudice;

(5) To find that the companies were unprofitable, and had placed no, or no sufficient, weight on Mr and Mrs Smith’s unexplained and dramatic growth in wealth.

The Court of Appeal’s Decision
 

Taking the more straightforward matters first:

On ground one, giving short shrift to the first instance Judge’s findings, the Court of Appeal found that it was well established that a director could not, for their own account, take advantage of opportunities of which they became aware as a result of their position, simply because the company was not in a position to act on those opportunities. However, this was not itself determinative of the appeal.

Ground three was held to be ill founded. The Judge’s finding that a fair offer could have cured any unfair prejudice suffered was confined to the exclusion from management alleged by the Petitioners at first instance. The exclusion allegation had been rejected, and was not subject to appeal.

On ground four, the Court readily upheld the Judge’s findings – there was no evidence that increased salaries had been paid to the Smiths prior to termination of the joint venture; and the agreement (pursuant to which the parties had agreed to take equal salaries) had been brought to an end. As such, there was no unfair prejudice in the subsequent payment of increased salaries by KCL, duly authorised by KCL’s board.

On ground five, the Court of Appeal held that in light of the material available to the first instance Judge, he had been entitled to find that SGR and KCL were not significantly profitable, nor was it possible on the terms of the appeal to re-open the Judge’s findings about other alleged misappropriations of group assets.

Ground two:

In respect of ground two, the Court of Appeal’s findings on ground one (that a director cannot exploit opportunities personally, even if the company could not) effectively undermined the first instance Judge's reliance on the termination of the joint venture to find that Mr Smith had not breached his director’s duties. Even if the joint venture had been terminated, his statutory duties continued to apply in respect of any opportunity he had become aware of whilst acting as a director.

The Court of Appeal then grappled with whether and how such breach of duty may have caused unfair prejudice to Mr Song and his wife. The Court began its analysis by acknowledging that the possible insolvency of KCL and SGL (and thus their inability to pursue projects) was not relevant to whether a director had breached his fiduciary duties, however it was relevant as to whether unfair prejudice had arisen as a result of that breach: If a company has no value, it may be difficult to show that the shareholders' position has been made worse by the director's conduct.

The Court went on to draw a further distinction, the mere fact that a joint venture has ended does not entitle one partner to take the existing opportunities of the joint venture. That could only be achieved by agreement or via liquidation. However, the position is different where the director pursues future opportunities that the joint venture could have taken up, but had not done so prior to the termination of the joint venture. Where one party has effectively walked away from the joint venture, in this case by withdrawing their funding and refusing to cooperate,  it would be inequitable for them to allege unfair prejudice when the other party goes on to pursue the type of business that the joint venture was set up to conduct. The concept of fairness cuts both ways.

In this regard, the Holton Road project had been an existing opportunity of the group, because it had been acquired by KCL, and the opportunity to profit from its development was already within the group’s sphere. As such, Mr Smith’s pursuit of the Holton Road project was capable of being unfairly prejudicial. However, the Albany Road project was not. It was a future opportunity pursued by Mr Smith only after Mr Song had walked away from the joint venture.

As such, if the Holton Road project was profitable, the failure to account for those profits would, in principle, have unfairly prejudiced the Petitioners. Even so, no unfair prejudice would have arisen if the amount of the profit from the project was insufficient to discharge Mr Smith’s outstanding director’s loan to KCL, or if SGR and KCL would, even with the benefit of those profits, have remained insolvent, such that there would be no value in the Appellants’ shares in KGL.

The Court of Appeal did not have evidence before it as to the actual profitability of the Holton Road project and the relative impact profits may have had upon Mr Smith’s KCL loan account or the solvency of KCL or SGR, and so directed that the matter be returned to the High Court for determination.

Comment
 

It can be tempting to think that, where there has been a finding of a breach of duty by a director, a finding of unfair prejudice will inevitably follow. While in practice there are plenty of examples where that is the case, Song provides a salient reminder that breaches of directors’ duties and unfair prejudice are not co-extensive, and the facts must be carefully considered before seeking to ground unfair prejudice proceedings on the basis of a director’s breach of duty.

In this particular case, the insolvency of the group companies added an important dimension to the exercise: notwithstanding diversion of business by a director, unless it could be shown that the profits of the diverted business would have been sufficient to result in the aggrieved shareholder’s shares having a positive value, pursuing a claim in unfair prejudice would not provide a remedy.

About the author

Richard is a partner in the Dispute Resolution team. Richard’s experience covers a broad range of commercial disputes, with a particular focus on civil fraud cases, and disputes involving shareholders, directors and partnerships. He acts for both claimants and defendants, often in complex, multi-jurisdiction and high-value claims. Richard regularly obtains a variety of interim remedies, including worldwide freezing orders, injunctions, security for costs and disclosure orders on behalf of his clients.