Shareholder disputes: When is just and equitable liquidation appropriate?

Unfair prejudice claims are commonplace in the British Virgin Islands following the introduction of bespoke provisions in the BVI Business Companies Act 2004 and have all but replaced old fashioned just and equitable winding-up petitions. The Court of Appeal, in Wang Zhongyong & Ors v Union Zone Management Limited  BVIHCMAP 2013/0024 (Union Zone) however, for the first time considered a standalone just and equitable petition brought under section 162 Insolvency Act 2003 (IA)(liquidation on the just and equitable ground) rather than alongside an unfair prejudice claim (although that was argued at first instance).

The facts in Union Zone  were fairly typical. An offshore structure had been put in place to hold the shares in two valuable pharmaceutical companies based in the Peoples’ Republic of China (PRC). In 2011 the minority shareholders in the principal BVI company within the structure (Union Zone) brought a claim alleging that the affairs of Union Zone were being conducted in a manner which was unfairly prejudicial to them. The minority shareholders claimed that there had been a common understanding which led to the creation of a quasi-partnership between the shareholders and that the sole purpose for which Union Zone had been created, namely to obtain a public listing, had failed.

Law

Following the English decisions in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (Westbourne Galleries) and O’Neill v Phillips [1999] 1 WLR 1092, the Court of Appeal’s decision suggests that it will not lightly interfere with commercial transactions and relations by winding companies up on the just and equitable ground. The Court of Appeal noted however that, as in England, the grounds for winding up a company on this basis might include exclusion from the management of the company in circumstances of a quasi-partnership, loss of substratum or deadlock. This list is not, however, exhaustive. The Court of Appeal also quoted with approval Lord Wilberforce’s oft cited statement in Westbourne Galleries  that ‘something more’ is required to engage equitable principles. In this regard the mere breakdown in the relationship between shareholders is not normally enough. In order for this to justify winding up the company the breakdown must lead to a deadlock on the board or between the shareholders in a general meeting or constitute a breach of some underlying agreement as to the shareholders’ rights of participation in the management of the company. On the facts of the case the trial judge considered that no quasi-partnership had been created in this case and the Court of Appeal upheld this finding.

The Court of Appeal also considered whether or not the sole purpose for which Union Zone had been established (namely to enable a public listing) had failed. It was noted that impossibility or frustration of purpose, if proved, would be a ground for winding up a company on just and equitable grounds. On the facts of Union Zone  however, although no public listing had been achieved, the Court of Appeal agreed with the trial Judge’s finding that although the restructuring (of which the planned listing was to be part) “did not produce the fruits which it was hoped…that it would, but that goes to commercial disappointment, not to violation of any agreement reached between co-venturers.” The Court of Appeal considered that the public listing was not in any event the sole purpose for which Union Zone was incorporated.

Finally, counsel for Union Zone sought to suggest that the Court of Appeal should look to the “business realities of the situation and must not be confined to a legalistic view, in circumstances where you have a holding company and a subsidiary. In an appropriate case, the conduct of the subsidiary or one of its directors who happens to be a director of the holding company may be regarded as the affairs or conduct of the holding company.” The Court of Appeal referred to the ratio in Rackind v Gross  [2005] 1 WLR 3505 and considered that although this principle may be applied in certain situations, it was of no application in Union Zone. In this regard it noted that Union Zone was not the holding company of the relevant entity and there was no conduct complained of at the level of Union Zone itself which was said to be prejudicial to the appellants.

Analysis

As noted above, it is therefore clear that the Court of Appeal will follow the approach outlined in the English authorities on just and equitable winding up and will utilise it only as a remedy of last resort. This is consistent with the approach taken in other major BVI decisions such as Aris v Quantek BVIHCOM 2010/0129.  On that occasion, an investor in a BVI mutual fund sought to wind it up on just and equitable grounds because it has suspended redemptions and had effectively stopped acting as a hedge fund. The Commercial Division declined to appoint liquidators where the company was still operative, even though it was in run-off.

There are, however, still plenty of remedies available to oppressed shareholders who can also bring a claim for unfair prejudice under section 184I of the Business Companies Act 2004 (184I claim). On the facts of Union Zone, the minority shareholders’ 184I claim was not established. The minority did not seek to appeal this finding but instead appeared to switch their claim to seek a just and equitable winding up on Appeal. If, however, the minority shareholders had been able to establish unfair prejudice then section 184I provides the court with the discretion to grant “such order as it thinks fit.” Such orders can include, but are not limited to, ordering one shareholder to buy the other shareholder’s shares, orders regulating the future conduct of the company or orders requiring the payment of compensation.