Song v Smith: Court of Appeal clarifies fiduciary duty and unfair prejudice where joint venture has terminated

The Court of Appeal has allowed in part an appeal against the dismissal of an unfair prejudice petition arising from the breakdown of a property development joint venture in Cardiff, clarifying important principles about the limits of fiduciary duty and unfair prejudice where a quasi-partnership has terminated. The judgement in Guorui Song & Anor v Kes Smith & Ors [2026] EWCA Civ 719, handed down by Lord Justice Zacaroli on 9 June 2026, with whom Lady Justices Whipple and Cockerill agreed, engages directly with the Supreme Court's recent restatement of the profit rule in Recovery Partners GP Ltd v Rukhadze [2025] UKSC 10.

Mr Song and Mr Smith had operated a joint venture through a group of companies, with Mr Song providing funding and Mr Smith managing construction works on housing association refurbishment contracts in Cardiff and the surrounding area. The relationship broke down irretrievably in July 2022, shortly after Mr Song withdrew his director's loan of approximately £1.2 million and refused to provide further funding. The judge at first instance dismissed the petition, finding that the joint venture had mutually terminated and that Mr Smith had therefore been free to pursue two subsequent refurbishment contracts, at Holton Road and Albany Road, through newly incorporated companies.

The Court of Appeal upheld the finding that the joint venture had terminated in July 2022 as a result of Mr Song's withdrawal of funding. It also agreed that termination meant Mr Smith was in principle entitled to pursue genuinely future opportunities for his own account without that being unfairly prejudicial to Mr Song, notwithstanding that those opportunities would have fallen within the scope of the joint venture had it continued. A quasi-partner who unilaterally withdraws funding and cooperation, the court held, cannot readily claim unfairness when the other party pursues for themselves what would otherwise have been joint ventures.

The court drew a sharp distinction, however, between future opportunities and maturing ones. The first instance judge had erred in law in treating the inability of the Group companies to take up the Holton Road and Albany Road projects as a defence to breach of fiduciary duty. Applying Rukhadze, it is no answer that the company could not itself have exploited the opportunity. On that basis, both projects were initially characterised as involving a breach by Mr Smith of his duties under section 175 of the Companies Act 2006.

The position of each project then diverged. Albany Road had never been an asset of the Group. The property was not owned by any Group company, the contracting entity was only incorporated in February 2023, and the most that could be said was that it had been on the Group's radar as a potential future project at some earlier stage. The Albany Road project therefore fell on the permissible side of the line.

Holton Road was different. The property had been purchased by the Group company SGR before the breakdown of the relationship, with loans that were subsequently repaid from SGR's own assets. The commercial opportunity lay in the building contract that followed the sale of the property to a housing association, and Mr Smith had been in discussions about that contract during July 2022 itself, before the joint venture terminated. That opportunity had already matured, and the benefit of the resulting contract belonged to the Group.

The court declined, however, to conclude that unfair prejudice was thereby established. On insolvent companies, any profits properly accountable to the Group would first have to be weighed against Mr Smith's substantial director's loan to KCL. If those profits did not exceed the outstanding loan balance, or if the Group would have remained insolvent even with those profits applied, the Petitioners' shares would have remained worthless and no unfair prejudice would have resulted.

Insufficient findings had been made below to resolve those questions, and the court directed a preliminary hearing to assess whether the Petitioners had a real prospect of establishing that Holton Road generated profits, that those profits exceeded the loan balance, and that they would have enhanced the value of the Petitioners' shares in KGL.

Guorui Song & Anor v Kes Smith & Ors [2026] EWCA Civ 719. Ben Shaw KC and Samuel Parsons (Huttons Law) for the appellants; James Pearce-Smith (Darwin Gray Solicitors) for the respondents.