The High Court ruled on the second part of a legal dispute over who controls a chain of bubble tea shops. Part one of the dispute was an unfair prejudice petition under Section 994 of the Companies Act 2006 between many but not all of the same parties.
Background:
Since 2019, the chain of bubble tea outlets in question has been operated to a substantial extent through the fifth defendant, Bubble Citea Ltd. (OpCo) under the brand name "Bubble Citea" (the ‘Brand’). The Bubble Citea business operates through kiosks and small shops, which are generally located within shopping malls across Britain, although there is a more extensive presence in the south of England. There are 28 outlets currently operated through OpCo and a further 25 operated through the sixth defendant, Citea Outlets Ltd. All 53 outlets use the same Bubble Citea branding, and all are presently under the control of the defendants.
The case arises from the transfer on 25 August 2020 of the sole share (the Subscriber Share) in OpCo by its former owner Enno Capital Ltd. (now in liquidation) to the first defendant (Bubble City), at the same time that Enno also transferred the sole share in Bubble City back to its original owner, the third defendant, Mr. Suneet Singh Sachdeva. Those transfers were made pursuant to the terms of an alleged written Settlement Agreement (SA) dated 12 August 2020 made between Mr. Sachdeva and Enno without Mr. Xie’s knowledge. The claimant alleges that the SA was void insofar as it purported to provide for Enno to sell and for Mr. Sachdeva to procure that Bubble City should buy the entire share capital of OpCo. The claimant claims as an assignee of Enno's claims against the defendants.
The background of the case concerns Mr. Sachdeva, who founded the Brand, and Mr. Yijian Gao, who, in early 2019, partnered with Mr. Xie, a Chinese investor, through the second defendant, Mr. Qingheng Meng. This led to Mr. Xie investing significantly in Enno, which acquired Mr. Sachdeva's original companies (Bubble City and Bubble Portsmouth) and established OpCo and SupplyCo as its subsidiaries. Mr. Xie became the majority shareholder in Enno.
Relations between Mr. Xie and Mr. Sachdeva, Mr. Meng, and Mr. Gao deteriorated significantly in early to mid-2020. This culminated in Mr. Meng purportedly removing Mr. Xie as an Enno director and attempting to dilute his shareholding, leading to hostile exchanges, whereupon Mr. Sachdeva indicated a desire to "recall" his original deal and reclaim both Bubble City and the Brand.
Decision:
The High Court ruled in favour of the claimant on several grounds, requiring Mr. Sachdeva to transfer 100 shares to the claimant. The Court concluded that Mr. Meng, Mr. Sachdeva, and Bubble City are jointly and severally liable to the claimant for equitable compensation of £1,800,000 or alternative damages in that sum.
The Court found that Mr. Meng breached his fiduciary duty to Enno by agreeing to the terms of the SA, which favoured his interest over those of Enno and the creditors. Clause 2.2 was declared void but can be severed from the SA, meaning that the remainder of the agreement stands.
The Judge rejected the argument that Mr. Xie's 15 June 2020 text message to Mr. Meng granted authority to negotiate a broad compromise, finding it was merely a request for documents that Mr. Meng deliberately avoided. Enno's articles required directors’ decisions by majority at a properly called meeting or by unanimous consent. Neither occurred for the SA.
The Judge found for the claimant on all aspects of Issue 2, confirming a proprietary claim to the original OpCo Subscriber Share and personal liability for Mr. Sachdeva. The Judge affirmed the principle from Byers v. Saudi National Bank that when a director misapplies company property in breach of fiduciary duty, the company retains the equitable beneficial interest in that property.
The Judge rejected the defendants' argument that the claimant's claim for equitable compensation was barred by the reflective loss principle, as clarified by Marex Financial Ltd v Sevilleja.
Implications:
This lengthy judgement offers an application of the Marex Supreme Court decision. This case demonstrates how the Marex ruling has effectively rolled back the expansive interpretation of the reflective loss rule. It also reaffirms that the reflective loss principle is strictly confined to claims by shareholders for a diminution in share value or distributions that merely reflect a loss suffered by the company for which the company has its own cause of action.
Claims brought by claimants in capacities other than that of a shareholder are no longer barred by the reflective loss rule, even if the company has a concurrent claim. This opens the door for a wider range of claimants to pursue their own losses directly, even if such losses are related to harm caused to a company. The key is whether the claimant's loss is "separate and distinct" from the company's loss. Here, the deprivation of ownership itself, and the consequent reduction in the value of the asset being returned, was deemed a distinct loss to the claimant, not simply a reflective loss of OpCo's own internal trading losses.
This judgement provides clarity and potentially greater recourse for claimants in complex corporate disputes, especially where directors have acted improperly. The case serves as a stark reminder of the stringent fiduciary duties owed by directors to their companies and shareholders. Breaches of these duties, especially when involving self-dealing or preferring personal interests, can lead to severe personal and corporate liability.