In the world of business, it is not unusual for friends or long-term associates to start ventures based on a verbal understanding and a "handshake”. However, the Court of Appeal (CoA) recently highlighted that relying on an oral agreement for company shares is a risky gamble, one that may end in costly legal defeat. This case serves as a vital reminder that, without a written contract, your contribution of time and money may not guarantee you the shares you were anticipating.

Background:

The appellant, Sukhwinder Singh, appealed a decision of the High Court which had dismissed his claim for specific performance of an alleged oral agreement with the first respondent, Makhan Singh Bains, an agreement under which each party was to hold an equal shareholding in GB Retail Ltd. (GBRL), the second respondent. The appellant and respondent, both originally from India, met around 2006 and became involved in various business ventures together, including drinks wholesaling through Goldbeach Trading Ltd. and retail operations through GBRL and its associated companies.
GBRL was incorporated in November 2014 with the respondent as sole director and shareholder. The appellant claimed that, following his obtaining leave to remain (LTR) in the UK in May 2015, the parties met with their accountant, Dr. Sachdev, in mid-2015 and agreed that the appellant would receive 50% of the shares in GBRL. The respondent denied any such agreement, maintaining that only profit-sharing was discussed.

For years, the parties operated with extreme informality. The appellant managed the day-to-day operations, introduced business leads, and even made a payment of £39,000 into the company account. The company’s accountant even filed documents at Companies House at one stage showing the parties as joint shareholders. However, when the relationship soured in 2021, the respondent—who was illiterate and spoke limited English—maintained that he was the 100% owner. He argued that while he had agreed to share the profits of the business with the appellant as a form of salary, he had never agreed to give away half of the company itself. The trial Judge originally ruled against the appellant, finding that no such oral agreement existed. The appellant then took the case to the CoA.

Decision:

The CoA dismissed the appeal and upheld the original decision. The Justices noted that, in cases involving oral agreements, a witness's credibility is the most important factor. The appellant’s case was fatally undermined because his story shifted multiple times—changing the dates when the agreement supposedly started and offering contradictory accounts of whether he owned other side businesses exclusively or jointly. The Court found that the £39,000 payment was not definitive proof of a share purchase, as the company's ledgers had actually recorded it as a "loan" rather than a capital investment.

Ultimately, the Court ruled that the appellant had failed to prove his case on the "balance of probabilities," leaving the respondent as the sole owner of the business.

Implications:

This judgement carries significant implications for anyone entering into an informal business arrangement. The first and most critical lesson is that Companies House filings are not a substitute for a legal contract. Just because an accountant registers you as a shareholder does not mean a court will recognise that ownership if the underlying agreement is disputed. Moreover, if the "paperwork" was filled out based on one-sided instructions, it can be dismissed as a mere administrative error.

Secondly, the case demonstrates the "credibility trap". If a dispute reaches court, a judge will scrutinise every letter, email, and witness statement you have ever sent. If your story changes even slightly over time, a judge may find your entire evidence "unreliable," making it almost impossible to win a claim based on a verbal promise. Finally, for those operating in multi-lingual environments, the case highlights the danger of using ambiguous terms. In this instance, the Punjabi word "sanja" (meaning "joint" or "together") was interpreted by the Court as a profit-sharing arrangement rather than a transfer of company equity. To protect your investment, every business partnership should be solidified with a formal Shareholders' Agreement that clearly defines the difference between earning a share of the profits and owning a share of the assets.