In the recent case of 12345 Retail Group Ltd -v- Bubble City Limited, the High Court was asked to consider the validity of two share transfers in a settlement agreement which had the effect of transferring the business of Enno Limited (“Enno”) to Bubble City Limited (“Bubble City”).
Following an investment into Bubble City which sold a type of milk or fruit tea originating in Taiwan, the relations between the parties deteriorated. Enno had been set up to facilitate the investment but the founder of the business, Mr Sachdeva, exercised an option to recall his shareholding in Bubble City which had been sold to Enno. Mr Sachdeva and another investor, Mr Meng, then entered into an agreement to settle what was said to be a dispute about the transfer back to Mr Sachdeva which made provision for two further share transfers from Enno to Bubble City.
The third investor was not made aware of the settlement agreement or the share transfers which had served to strip Enno of its business and transfer it to Mr Sachdeva. In response, the third investor issued proceedings in relation to the share transfer and the case was decided in the High Court.
The judge found that when Mr Meng, a director of Enno, agreed to the second transfer of the claimant’s subscriber share, he had failed to act in the best interests of Enno and had prioritised maintaining his relationship with Mr Sachdeva at a time when Enno was heavily indebted, on the verge of becoming insolvent and was left without the means of earning any income.
As a result of Mr Meng’s breach of duty, the second transfer was void and the claimant was entitled to recover the share if it could be shown that Bubble City was not a good faith recipient which had no knowledge of the breach and would be entitled to keep the share under s.40(1) of the Companies Act 2006. However, Mr Sachdeva was the sole shareholder of Bubble City and knew that the intention behind the transfer was the transfer of Enno’s entire business for his own benefit. Mr Sachdeva was therefore liable to the claimant both for dishonestly assisting with the unlawful transfer and knowingly receiving the share which allowed the Court to make an order for its return to Enno.
The claimant was also entitled to a claim against 99 recently issued shares held by Bubble City in the operating company which ran the bubble tea outlets. The court accepted that the shares had been issued to dilute the value of the claimant’s own share in the operating company and that the value of this share could now be identified in the 99 new shares.
Alex Haddad (ahaddad@nockolds.co.uk 0203 892 6805) works in the Litigation Department and deals with company, commercial and property disputes.