When Joint Ventures Turn Sour: The Unforgiving Reality of Directors’ Duties

It is a remarkably common scenario in the world of property development and commercial enterprise: two parties enter into a joint venture. One provides the capital; the other provides the industry expertise. They incorporate a limited company, shake hands, and get to work.

But what happens when the relationship breaks down? When the funding stops, the trust evaporates, and the joint venture reaches a state of deadlock, many directors make a fatal assumption. They assume that because the commercial partnership is “dead,” they are free to walk away, set up a new company, and take the pipeline of work with them.

Under English corporate law, that assumption is not just wrong—it is a breach of fiduciary duty that can cost millions.

The Anatomy of a Corporate Hijacking

Consider a recent case study involving a multi-million-pound property development joint venture. The relationship between the investor and the developer broke down.

The joint venture company (Company A) was allegedly starved of cash and facing insolvency.

The developer, who was a statutory director of Company A, decided the joint venture was over. To keep the construction projects moving, he set up several new “Phoenix” companies. He then actively diverted highly lucrative, multi-million-pound build contracts away from Company A and into his newly formed entities.

When challenged by the investor through an unfair prejudice petition, the director’s defense seemed commercially intuitive: The joint venture was dead. The company was hopelessly insolvent. It could not have completed the contracts anyway. Therefore, no loss was suffered, and I was entitled to take the work to survive.

The Legal Reality: Insolvency is Not a Defence

The fatal flaw in this defence is the failure to distinguish between an informal partnership and a formal corporate vehicle. Once a business is wrapped in a limited company, the directors owe strict, statutory duties to that company under the Companies Act 2006, specifically:

• Section 172: The duty to promote the success of the company.
• Section 175: The duty to avoid conflicts of interest (the “No Conflict” and “No Profit” rules).

A director cannot unilaterally declare a company “dead” to justify setting up competing businesses. Furthermore, English law has been unequivocally clear since the landmark case of Regal (Hastings) Ltd v Gulliver: a company’s financial inability to take advantage of a corporate opportunity does not give a director the right to take it for themselves. If a company is insolvent, a director’s duty of loyalty becomes even more acute to protect the creditors and shareholders. They must put the company into a formal insolvency process, or formally resign and seek authorisation. They cannot simply cross out the company’s name on a contract and write in the name of their own Phoenix company.

Hijacking Existing Assets vs. New Opportunities

The strictness of the law bites hardest when directors conflate “new” business with “existing” assets.

In our case study, the director argued he was only taking on “new” contracts outside the scope of the original joint venture. However, the documentary reality showed that the land for the largest development had already been purchased by the joint venture for £350,000. The director had not found a new client; he had carved out the lucrative construction phase of a maturing asset that the joint venture already owned and handed it to his personal company.

In equity, this is the expropriation of an existing corporate asset. Even if a director later claims their Phoenix company lost money on the hijacked contract, it does not retrospectively legitimize the initial breach of duty.

Key Takeaways for Directors and Investors

1. You Cannot “Informally” Exit a Corporate Joint Venture

If you are a director of a deadlocked company, you cannot simply walk away and start competing. There are only two lawful ways to exit: a formal buyout of shares at a fair, independent valuation, or placing the company into a formal insolvency/winding-up process.

2. Valuation Cannot Ignore Stolen Assets

If an offer is made to buy out a minority shareholder, that offer must be based on a true valuation. If a director has diverted contracts away from the business, a “fair” valuation must be conducted as an account of profits—meaning the company must be valued as if those stolen contracts had remained within it.

3. The Burden of Proof is on the Fiduciary

If a director suddenly amasses significant personal wealth or starts lending massive sums back to a struggling company using “turnover” from their new side-businesses, the courts will demand strict documentary proof of where that money came from. Uncorroborated oral testimony of “windfalls” or “inheritances” rarely survives the scrutiny of the appellate courts.

Conclusion

The breakdown of a joint venture is highly emotional, but the law governing it is ruthlessly objective. Directors who allow the breakdown of a personal relationship to override their strict statutory duties do so at their extreme peril. Before you decide to “save” a failing project by moving it to a new company, remember: corporate opportunities belong to the company, and the courts will follow the money.

Hutton’s Law have acted for shareholders and quasi partners in many disputes of this type. Please do not hesitate to contact us should you need assistance.