Valuable guidance on winding up a company as a means of solving a shareholder dispute

Shareholder disputes are common, many and varied.  The parties can often become entrenched and the dispute can become hard fought.  Because of this, and the need for the shareholder to safeguard their financial interest in the company, the claims brought can often focus around the wronged party seeking to recover their loss or the value of their shareholding.  Claims for unfair prejudice under section 994 of the Companies Act 2006 (where a common remedy is for one shareholder to buy out the other) or claims involving a derivative action where the shareholders seek to recover money from an errant director (who is often also a shareholder) for their breach of directors’ duties / company constitution, are often preferred.

However, one remedy that is ever present, but often overlooked, is to have the company wound up because it is ‘just and equitable to do so’.  In the recent case of Chu v Lau [2020] UKPC24, the Privy Council handed down some useful guidance on the law here with a focus on the alternative roles that apply to quasi-partnerships.

Mr Chu and Mr Lau were equal shareholders and sole directors of a shipping company incorporated in the British Virgin Isles (BVI) – Ocean Sino Limited (OSL).  They were also directors of OSL’s subsidiary company PBM Asset Management Limited (PBM).  PBM entered into a joint venture agreement with Beibu Gulf Ocean Shipping (Group) Limited (Beibu).  PBM owned 41% of Beibu and the remaining 59% was owned by the Peoples Republic of China.

The relationship between Mr Chu and Mr Lau broke down in 2014.  They sought to sever their business relationship.  Mr Lau applied to the BVI Commercial Court to wind up OSL on a just and equitable basis, alleging:

i)             an irretrievable breakdown of trust and confidence between him and Mr Chu; and

ii)            functional deadlock in the management of OSL at both board and shareholder level.

In June 2017, Justice Roger Kaye QC granted the relief sought, finding the allegations proved.  Mr Chu appealed to the Court of Appeal of the Eastern Caribbean Supreme Court.  The Court of Appeal unanimously reversed the first instance decision.  It considered that the first instance judge had been wrong to consider:

  • the falling out between Mr Chu and Mr Lau in the context of OSL when it had actually been over Beibu;
  • in failing to take into account that Mr Chu and Mr Lau could sell their shares;
  • to take into account events that had occurred between Mr Chu and Mr Lau after their petition to wind the company up had been filed at court;
  • in failing to consider alternative remedies before ordering winding up.

Mr Lau appealed from the Court of Appeal to the Privy Council.

The Privy Council reversed the Court of Appeal’s decision and ordered that OSL be wound up.  In reaching their decision the Privy Council held:

  • OSL was a quasi-partnership.  It applied the guidance given in the case of Ebrahimi v Westbourne Galleries Limited [1973] AC360.  Quasi-partnership here means that there was a personal relationship or mutual confidence between the shareholders akin to that of a partnership.
  • The Privy Council rejected Mr Chu’s submission that there could be no quasi-partnership where there was no restriction on the parties being able to sell their shares.
  • Where there is a quasi-partnership – no aspect of the shareholders’ business relationship was likely to be irrelevant to the court determining an irretrievable breakdown in trust and confidence.  The first instance judge was therefore right to take in account the issues with Beibu when considering the deadlock in OSL and the loss of mutual trust and confidence.
  • The Privy Council was content to rely on the first instance judge’s view that the relationship between Mr Chu and Mr Lau had deteriorated sufficiently to order winding up.
  • The Privy Council found that the facts relevant to a just and equitable winding up were those prevailing at the time the petition is heard and there was nothing that confined the facts to those at that time the petition was filed.
  • Lady Arden (Privy Council) also considered that Mr Lau’s exclusion from management of OSL was another basis for the winding up.
  • The Privy Council determined that the Court of Appeal was wrong to rule that it had jurisdiction to order that Mr Lau’s shares be purchased.  This was only allowed under an unfair prejudice petition and not winding up.
  • Pursuant to BVI law – it was for the Respondent to prove that the application was unreasonable in bringing the petition.
  • The Privy Council found on the facts that none of the alternative remedies proposed were appropriate.
  • The Privy Council helpfully commented that it was not necessary in winding up petitions to prove the same standards of impropriety / unfairness as that required in an unfair prejudice claim.
  • It determined that a member of a company would only be expected to sell their shares to break the functional deadlock where they could do so on fair terms.
  • The Privy Council found that Mr Lau’s freedom to sell his shares was academic as:
    • the shares did not confer a right to be appointed to the board, leaving Mr Chu as sole director;
    • Mr Chu had failed to provide information about Beibu, which any new shareholder would require before buying OSL shares;
    • the notoriety of the dispute between Mr Chu and Mr Lau would have had an impact on the demand for any shares.
    • The fact Mr Lau was partially responsible for the dispute did not bar him from petitioning for a winding up.  The equitable doctrine of coming to the court with clean hands would only bar Mr Lau if he had solely been responsible for the dispute.

Conclusion

While Privy Council decisions are only persuasive and not binding on English courts, the clarification given in Chu v Lau is very welcome and likely to be followed.

The areas to be considered can be wide and the importance of quasi-partnerships, in the context of a just and equitable winding up, have been reinforced.  Just and equitable winding up is often considered a weapon of last resort.  However, given the clarification of the Privy Council and the uncertain economic times created by Covid-19, we may see more of them where the need for shareholders to protect / recover their losses/shareholding’s value is less important.

If you would like to discuss this case, or have a shareholder dispute that you would like advice on, please do not hesitate to contact the writer, Graham Mead on 01473 298234 or gmead@prettys.co.uk.

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