What happens when two people embark on a joint business venture through jointly held companies, one party withdraws funding when the two fall out, but the other party continues to pursue opportunities of the same type as those undertaken by the joint business venture, using different corporate vehicles?
Is the party that continues to pursue such opportunities “diverting business” from the joint venture companies, in breach of their fiduciary duties to them, if the party does not account to the companies for any profits? If so, is that conduct also unfairly prejudicial to fellow shareholders in the joint venture companies?
These were the questions answered by the Court of Appeal in Song & Anor v Smith & Ors [2026] EWCA Civ 719, applying the Supreme Court decisions in Recovery Partners GP Ltd v Rukhadze1 and BTI 2014 LLC v Sequana SA2. The Court found that, yes, the party continuing to pursue business opportunities could be in breach of their fiduciary duties to the joint venture companies not to keep profits for themselves without their consent (the “profit rule”), even after the quasi-partnership was effectively terminated. That the companies were, or near, insolvent made no difference to that duty.
However, that breach will not necessarily be unfairly prejudicial. Where the opportunity pursued was merely a ‘future’ prospect, the withdrawing business partner cannot complain. Where it had already crystallised into a ‘matured’ opportunity, breach may cause unfair prejudice if the petitioner can show the breach actually diminished the value of their shares. Where that line falls will depend on the facts, in particular on contemporaneous evidence about how advanced the potential deals were at the date of the relationship breakdown.
Mr Song and Mrs Zhao (the “Petitioners”) and Mr and Mrs Smith (the “Respondents”) ran a joint venture business developing properties, largely for housing associations. At the relevant time, the venture was run through Kestral Group Ltd (“KGL”) in which the Petitioners and Respondents were equal shareholders, and KGL’s property-development subsidiaries, SGR Estates Limited (“SGR”) and Kestral Construction Limited (“KCL”). Mr Song and Mr Smith were directors of all three companies (together, the “Group” or the “joint venture companies”). Mr Song was responsible for funding the purchase of the properties, primarily through loans to SGR. The construction work was subcontracted to KCL and managed by Mr Smith.
Mr Song withdrew his director's loan from SGR shortly after April 2022 and refused to contribute further funding. By July 2022, the parties' relationship had irretrievably broken down. The Respondents offered on two occasions to buy out the Petitioners’ shares in the Group, but the Petitioners rejected both, Mr Song being convinced that Mr Smith had misappropriated the Group's assets on a large scale and disputing the valuations of SGR and KCL as being near or actually insolvent.
After the breakdown, the Respondents continued in business:
The Petitioners brought an unfair prejudice petition under s.994 Companies Act 2006, alleging that Mr Smith had breached his directors’ duties and fiduciary duties to the joint venture companies by: (i) misappropriating money from the Group; and (ii) diverting valuable business opportunities away from the Group after the relationship had broken down. HHJ Jarman KC found inter alia that:
The Petitioners appealed on a number of grounds. This article focuses on those concerning Mr Smith's alleged breach of duty and the impact of that alleged breach on the unfair prejudice petition.
Lord Justice Zacaroli gave the leading judgment, with which Lady Justices Whipple and Cockerill agreed.
There was a continuing fiduciary duty under the profit rule: Following the majority in Rukhadze3, the Court reaffirmed that directors owe a fiduciary duty to account for profits arising from their position, including profits made after the relationship has ended. Mr Smith was therefore potentially in breach of his fiduciary duties to SGR and KCL by pursuing opportunities connected with his directorship of those companies through his own vehicles. It was no defence that the quasi-partnership had terminated or that SGR and KCL were insolvent or near insolvent and so could not themselves exploit those opportunities. However, insolvency did mean that the focus of the director’s fiduciary duties shifted to require consideration of the interests of the company’s creditors as a whole (as opposed to the interests of the shareholders as a whole). The interests of the creditors as a whole lie in maximising the value of the company's assets to enable payment of its debts and thus in a director complying with the profit rule by accounting to the company for any relevant amounts.
Whether the breach could amount to unfair prejudice turned on whether the opportunity was ‘future’ or ‘matured’: While the termination of the joint venture made no difference to Mr Smith’s continuing fiduciary duties to the joint venture companies, as director, it was not necessarily unfairly prejudicial for him to have pursued future projects which, had the parties not fallen out, would have fallen within the scope of the joint venture. The partner who walks away, withdrawing their investment, can hardly complain of unfairness when the other pursues new opportunities for their own account.
That reasoning has its limits though. It does not entitle the remaining director to help themselves to the company's existing assets or business. Applying that distinction, the Court held that Albany Road was, at best, a potential future project. In contrast, Holton Road was a “maturing” opportunity: it was an existing asset of SGR, funded from SGR's own resources with refurbishment plans contemplated well before the relationship broke down. Mr Smith therefore continued to owe the joint venture companies a duty under the profit rule to account to them for any profits, notwithstanding the termination of the joint venture.
The Court held that that duty was breached in respect of the Holton Road project, which was a matured opportunity that belonged to the joint venture companies. As such, if that project was profitable, the failure to account for those profits would, in principle, have unfairly prejudiced the fellow shareholders in the joint venture companies.
Whether the Petitioners were actually unfairly prejudiced, however, remains to be determined: Following Re Tobian Properties Ltd [2012] EWCA Civ 998, the Court directed a preliminary hearing to determine whether the Petitioners have a real prospect of establishing that: (i) the Holton Road project generated profits; (ii) those profits exceeded the amount outstanding on Mr Smith’s director’s loan account with KCL; and (iii) if those profits had been paid to KCL, that would have enhanced the value of the Petitioners’ shares in KGL. This final point is particularly significant in circumstances where the companies appear to be insolvent and so even additional profits being paid to the companies may have no impact on the value of the shares in them.
The decision underscores that the profit rule, as reaffirmed by the Supreme Court in Rukhadze, is not tempered by the breakdown of a quasi-partnership or the insolvency of a company. Directors who find themselves on the continuing side of a failed joint venture should not assume they have a free hand to pursue business opportunities for their own account. Nor can they shelter behind a buy-out offer: following North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625, such an offer is only an answer to an allegation of exclusion, not to claims of misappropriation or diversion of opportunities.
The distinction between ‘future’ and ‘matured’ opportunities may form a key battleground in post-breakdown disputes. Directors and shareholders involved in quasi-partnerships should pay close attention to each opportunity's stage of development at the date of the breakdown. Contemporaneous records such as board minutes, emails with counterparties and heads of terms will be critical. The further an opportunity had progressed by the breakdown, the greater the risk that it will be treated as a matured asset of the company that the remaining director cannot simply appropriate.
Finally, even where breach of fiduciary duty by a director may be established, shareholders bringing an unfair prejudice claim face a further hurdle in showing that the breach diminished the value of their shares. This may be particularly challenging where the company is insolvent or near-insolvent. In addition, a director’s loan account, built up from continued funding after the other partner's withdrawal, may make it impossible to show an impact on share value. The Petitioners' victory here may yet prove pyrrhic if they cannot clear these hurdles.
1 [2025] UKSC 10; [2026] AC 209
2 [2022] UKSC 25; [2024] AC 211
3 For more details on Rukhadze, see our article here
