Article / 1 Nov 2025
In this month’s corporate update we:
The High Court has recently considered some common commercial contract warranties in a share purchase agreement, providing useful guidance on how those warranties may be interpreted.
In Atten Bidco Ltd v Assassa and others [2025] EWHC 2347 (Comm), a buyer acquired an IT consultancy company from its original founder and other shareholders. The share purchase agreement contained various warranties relating to the contracts entered into by the target company. After completion, the buyer brought claims against the sellers for breach of two of these warranties:
The agreement also provided that the warranties would be qualified by matters “fairly disclosed with sufficient detail…to identify the nature and scope of the matter disclosed”.
In relation to the NAO Contract, the Court found that this was a major, fixed-price public sector contract, with tight deadlines and significant risks. There were substantial internal concerns at the target company about its ability to deliver the contract on time and within budget, with evidence of staff stress, missed milestones, and a need for significant “free of charge” work. The Judge found this meant that, in breach of the Performance Warranty, the NAO Contract could not readily be performed on time or without undue or unusual expenditure.
The Judge went on to find that although the sellers were aware of this, they had not disclosed it to the buyer. The disclosure letter contained an extract from a RAG report relating to the NAO Contract showing reduced profit margins. But that did not amount to fair disclosure as required by the agreement: the information provided was insufficient for a reasonable buyer to identify the true nature and scope of the problems. In addition, the requirement for disclosures to be in the disclosure letter or the data room meant that oral disclosures made at a pre-completion meeting between the parties were not sufficient.
In relation to the Aquila Contract, the Court had to decide whether Aquila was a “significant customer”. The agreement contained a list of the company's top ten customers by annual value of sales which did not include Aquila. But the Judge said a “significant customer” was not limited to these 10 customers and included any customer whose loss could materially affect the business. Aquila was found to be a significant customer, given the size of the contract, its contribution to projected revenue, and its strategic importance as a new client in a growth area.
The Judge rejected the sellers' argument that the loss of Aquila was simply “churn” or normal business risk. Instead, he found that the loss was both significant and likely to have a materially adverse effect on the company's business. Again, the sellers had failed to disclose the loss of the Aquila Contract in the disclosure letter, meaning there was a breach of the Customer Warranty.
This case provides useful guidance on two fairly common warranties relating to commercial contracts.
It highlights that warranties about the ability to perform contracts are not limited to profitability and qualitative factors, such as the level of effort and risk, may also be relevant. In addition, even in industries where some degree of customer churn is normal, the loss of a customer can be a breach of warranty where the business is materially affected.
The case also highlights that, for a disclosure to be effective as a defence to warranty claims, it must meet the required standard set out in the agreement. Where that requires “fair disclosure with sufficient detail”, vague references or oral disclosures will not be enough.
In Spill Bidco Ltd & ors v Wishart [2025] EWHC 2513 (Comm), the High Court considered the interpretation of restrictive covenants in a share sale agreement. In particular, the case considered whether lending money to a competing business resulted in the lender being “concerned” in that business in breach of the restrictions.
In December 2022, the founder of a manufacturing business sold his shares to a private equity-backed Bidco, remaining as a non-executive director post-completion. The sale agreement contained a restrictive covenant under which the founder agreed not to be “engaged or…concerned or interested in a competing business” within a defined area for a period of three years after completion. The related investment agreement contained similar covenants which applied for two years after the founder ceased to be a director or shareholder.
Bidco alleged that the founder breached the restrictions by providing assistance to two rival businesses. In particular, the founder had provided €150,000 of working capital to a Spanish company to which he also provided advice and assistance in sourcing products. This included giving the Spanish company supplier contact details and misrepresenting it to one of those suppliers as being a “sister company” of the former group. The founder also assisted a UK business by providing it with advice, including about pricing of certain products.
Each of the businesses had been set up by former colleagues of the founder. He argued that in assisting them, he had been motivated not by self-enrichment but by “generosity of spirit” and sympathy for his friends who he believed had been “shabbily dealt with” by the new management.
The Court considered whether the founder's actions meant he was “engaged, concerned, or interested” in the competing businesses in breach of the restrictive covenants.
When interpreting these words, the Judge said that being “engaged in” a business involves carrying on or transacting the business, and being “interested in” a business generally involved having a proprietary interest in it. Simply lending to a business did not involve either of those things.
But was the founder “concerned in” the rival businesses? Here, the Judge found that a person who lends funds for use in a business was capable of being concerned in that business within the meaning of the restrictions. The Judge said that the founder's activities had to be assessed as a whole. If the lending of funds or other assets is coupled with other activities to support, assist, or intervene in the business, the lender will likely be found to have become “concerned” in that business. Citing comments made in a previous case, the Judge agreed that there is “no more effective way of being concerned in a business than by providing the capital necessary to establish it”.
Based on the founder's actions in providing assistance, information and advice to the Spanish and UK businesses set up by his friends, the Judge found that he had breached the restrictive covenants on multiple grounds. The Judge also found that his actions constituted breaches of the fiduciary duties he owed as a non-executive director.
Anyone signing up to restrictive covenants, and those advising them, must understand that being “concerned or interested” in a business extends beyond direct ownership or employment. Although simply becoming a creditor may be permissible in some circumstances, any further involvement, advice, or assistance will likely trigger a breach of covenant. The threshold for being “concerned” or “involved” is low: sharing supplier lists, providing pricing advice, or leveraging former goodwill (such as claiming a new venture is a “sister company”) can be fatal. And, as the legal test is an objective one, being motivated by sympathy for friends or former colleagues will not negate a breach, regardless of any altruistic intent.
In Fang Ankong & anor v Green Elite Ltd (in liquidation) [2025] UKPC 47, the Privy Council held that a former director had breached his fiduciary duties by transferring company assets to himself (and others) without shareholder authority. When dismissing the director's appeal, the Privy Council confirmed that for informal shareholder consent (under the Duomatic principle) to be valid, that consent need not have the particular features of a binding agreement, but there must be clear, informed, and unanimous agreement by all shareholders entitled to vote.
Although Privy Council decisions are not strictly binding on English courts, the principles discussed in this case are substantially the same as under the laws of England and Wales, and this decision is likely to have persuasive value in the UK.
The Duomatic principle, (defined in Re Duomatic Ltd [1969] 2 Ch 365), allows shareholders to make decisions through informal, unanimous consent. It states that where all shareholders who would be entitled to vote on a matter at a general meeting give their unanimous and informed consent to that matter, that consent is as binding as a formal resolution.
Although the Duomatic principle has been invoked successfully in a wide range of circumstances, there are limits on its scope. For example, the principle cannot be relied on if there is evidence of fraud, or if the matter is otherwise unlawful or beyond the legal powers of the company.
The case concerned a BVI company (Company) that had been incorporated solely to effect an employee share benefit scheme for three key employees. The shares in the Company were held equally by two shareholders: Delco (a Dutch company) and HWH, a BVI company owned by a Mr Fang. Mr Fang and the three key employees were appointed as directors of the Company. Two of the key employees were related to Mr Fang.
The Company sold its primary asset (shares in another company) for HK$150 million, with the proceeds being paid into Mr Fang's personal bank account. The Company's board had not approved the payment to Mr Fang and neither had Delco been informed about it. Mr Fang subsequently distributed the proceeds of sale to the key employees (his fellow directors) in equal shares.
When the Company went into liquidation, the liquidators commenced proceedings against the former directors. They alleged that Mr Fang had, without authority, diverted the share sale proceeds to himself and then wrongfully distributed those proceeds to the other directors.
The BVI High Court agreed with the liquidators and held that Mr Fang and the other directors had acted in breach of their fiduciary duties. The High Court rejected the directors' argument that the Company's shareholders had given their informal assent to the payments.
Following a failed appeal to the BVI Court of Appeal, Mr Fang and HWH appealed to the Privy Council. Their appeal focused on:
The Privy Council rejected the appeal and upheld the decisions of the lower courts.
On the issue of directors' breach of duty, the Privy Council affirmed the established principle that directors (and other fiduciaries) may not pay themselves from company assets without proper authorisation. The Privy Council rejected the argument that as the Company's sole purpose was to deliver the employee share scheme, any action taken by Mr Fang to implement that purpose (including the distribution of the sale proceeds), had already been authorised. That argument ignored the fact that key elements of the share scheme – such as the price to be paid for the shares – still required shareholder approval, and the directors did not have the authority to decide those matters themselves. Without valid shareholder consent, Mr Fang and the other directors had acted in breach of duty by distributing and receiving the proceeds of the share sale.
As regards shareholder authorisation, the Privy Council acknowledged that Delco and HWH could have unanimously and informally authorised the directors' actions under the Duomatic principle. However, on the facts of the case, Delco had not approved the retention by Mr Fang of the sale proceeds or his subsequent payments to the other directors. The shareholders had agreed that the Company would be used to provide an employee share scheme, but all other scheme details were still to be agreed.
The Privy Council also confirmed that consent given in accordance with the Duomatic principle need not have the particular features of a binding contract. As such, the trial Judge had been “misguided” when using terms such as “creating legal relations” and “legally enforceable” when describing unanimous consent. However, the Privy Council accepted that what the Judge had in mind was that the shareholders intended to bind themselves legally, as if they had passed a formal resolution. Provided it could be shown that the shareholders had all assented to a particular matter, their assent would take effect as if it were a resolution passed at a general meeting.
This case is a useful reminder to directors of the importance of specific authorisation if they intend to transfer company assets to themselves or to any connected parties. Failure to obtain that authorisation will almost certainly mean that a director is in breach of their duties to the company and may result in the director being required to account to the company for any sums received (plus interest).
Best practice would be for the shareholders to pass a formal and properly documented resolution authorising the actions in question. If, however, the directors are relying on informal consent under Duomatic, then they must be able to demonstrate that all eligible shareholders assented to the specific mechanics of the transaction – there must be certainty as to what the shareholders are agreeing to. As illustrated by this case, shareholder consent of a generalised nature, without essential elements of the transaction being agreed, is unlikely to be sufficient.
First published in Accountancy Daily.
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