Song & Zhao v Smith & Smith & Others (2025) EWHC 949

This case shows the importance of giving settlement offers full and careful consideration. Here the Claimaints refused an offer made before proceedings were issued.

The Judgment in this case stated that even if the Claimants had proved their case they would not have been successful because of this refusal. Quoting Lord Hoffman in the O’Neill v Philips case, “…unfairness does not lie in exclusion alone but exclusion without a reasonable offer.”

Read our article on O’Neill v Philips for more information. ​

Please watch the video for a summary of this case, or read the full article below.

Cracks Emerge Amid Pandemic Pressures

In the bustling construction scene of Cardiff, two visionaries, Guorui Song from China and Kes Smith, a lifelong builder, forged a powerful alliance in 2016, transforming rundown buildings into modern flats. Projects like Provincial House in Barry, sold to Hafod Housing Association in July 2018 for £900,000 plus £3 million in conversion works, meant this was a lucrative business for both the entrepreneurs.

Their joint venture was restructured in August 2020 with the incorporation of Kestral Group Limited, owning subsidiaries; SGR Estates and Kestral Construction Limited (KCL). Mr Song provided the funding and Mr Smith the on-site expertise. 

By 2021, Covid lockdowns inflated costs; materials went up 24-60% and carpenter’s rates nearly doubled. This caused cash flow problems for the sites then being developed. Initially Song continued funding with £114,000 being put into the business by him from May 2021 to July 2022. However, tensions grew with Song believing that the business should be able to sustain itself from then on. These tensions were exacerbated when Song bought a £1.5 million London home in July 2022, borrowing £200,000 from Smith’s mother, Fatima Omar, whilst refusing to make further investments.​ 

The Crucial Meeting and £200,000 Offer

On 4 July 2022, Song) and Smith met amid fraying trust. Three days later, on 7 July, Smith emailed draft heads of terms offering to buy Song and wife Yali Zhao’s shares for £200,000, copying in their wives and advisor Diane White. The email urged a swift response: “The 200,000 has been agreed by both Alfred (Song) and Kes (Smith),” warning the company was “in a very vulnerable position” due to Song’s withdrawn director’s loan, needing fresh capital for housing contracts.​ 

On 8 July, solicitors having been instructed, the Smiths’ offer of £200,000 for Song’s shares was set out in a solicitors letter.  

Song demurred, demanding clarity on profitability dips as housing payments shifted to Lloyds accounts under Smith’s control. Song commissioned BPU Ltd accountants for an audit, alleging misappropriation, while admitting KCL’s dire finances.​ 

song & zhao v smith

Escalating Standoff and Valuation Reality

On 12 July, Song relented and transferred £307,000 to KCL but flagged cash shortages. Smith countered, listing unpaid suppliers blamed on Song’s previous abrupt withdrawal.  

On 10 August 2022, Smith’s solicitors declared an irretrievable breakdown, remaking the offer of a buyout. 

The offer stood unaccepted. On 24 August, the company’s accountants (Bay Chambers) valued SGR at £83,000 (net assets) and KCL at nil, insolvent with £244,604 net liabilities, with Bay Chambers projecting £480,938 loss.  

The Dispute Goes to Court

With offers spurned and audits fueling suspicions, Song issued proceedings in July 2023 under s.994 Companies Act, alleging Smith fraudulently misappropriated funds via cash withdrawals, unexplained transfers, excessive salaries and mileage, family payrolls, and side projects like nightclub renovations which were all unfairly prejudicing their shares by excluding oversight and diverting business post-breakdown to new Kestral entities.

Smith countered fiercely, claiming Song’s loan withdrawal crippled the insolvent group, caused prejudice through disengagement, and that he rightfully completed projects while making a fair £200,000 buyout; they also sought declaration on the 10 Cyncoed Road trust.

Trial from 31 March to 3 April 2025 before HHJ Jarman KC at Cardiff’s High Court dissected fraud claims, cash withdrawals (£112,500 total, explained as subcontractor payments via texts), supplier transfers (invoices upheld), salaries (justified post-Song’s exit), family payroll (approved by Song), mileage, and side projects (knowledge proven). Judge dismissed ousting or duty breaches pre-breakdown, finding no fraud; Smith completed ongoing works using new firms’ turnover to lend KCL over £1 million.​ 

Post-breakdown, Smith formed Kestral Construction Holton Road Ltd and Albany Road Ltd for new contracts, as joint venture ended mutually, neither wanted partnership amid insolvency. Counterclaims against Song for prejudice failed too.

The Decisive Rejection That Sealed the Case

The judge’s verdict on 17 April 2025 hinged on the overlooked pivot of Song’s refusal of the £200,000 offer, far exceeding valuations, made days post-meeting before litigation costs mounted. Citing O’Neill v Phillips 1 WLR 1092, HHJ Jarman quoted Lord Hoffmann: “But the unfairness does not lie in exclusion alone but exclusion without a reasonable offer. If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial.” Even assuming exclusion, rejection barred relief, no unfair prejudice under section 994.​ 

“Accordingly, even if contrary to my findings, Mr Song was excluded, the offer made and rejected was a reasonable one and so there was no unfairness.” 

Why This Case Matters

This case is proof that even perceived exclusion from management does not constitute unfairness if countered by a reasonable buyout offer, as affirmed by HHJ Jarman KC invoking Lord Hoffmann’s principle in O’Neill v Phillips. Exclusion alone isn’t prejudicial without rejecting such an offer.  

Delivered on 17 April 2025 after a four-day trial, the judgment dismissed fraud allegations (cash withdrawals, salaries, diversions) due to cogent evidence like texts and invoices, while valuing insolvent subsidiaries at near-nil, highlighting how litigation erodes value post-rejection of a £200,000 share offer exceeding appraisals.  

For small business owners, especially in construction, it stresses documenting joint ventures, accepting early exits amid disputes, and recognizing that courts prioritize commercial reality over acrimony, potentially saving partnerships from courtroom ruin. 

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