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13-11-2020

Although a decision of the Privy Council on appeal from the Eastern Caribbean Court of Appeal, Chu v Lau [2020] UKPC 24 has general implications for the law on winding up a company on the just and equitable ground.

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Mr Lau, the appellant, and Mr Chu, the respondent, were 50/50 shareholders in and directors of a BVI company, Ocean Sino Limited which they operated as a quasi-partnership. Differences arose between them that culminated in Mr Lau’s applying to the BVI Commercial Court to wind up the company on the ground that it was deadlocked. Mr Chu defended the petition.

Mr Justice Roger Kaye, sitting at first instance in the High Court of the BVI, found deadlock and made a winding up order, but his decision was overturned on appeal, the court holding, inter alia, that other remedies were available such that the judge should have ordered Mr Chu to buy Mr Lau’s shares.

On appeal to the Privy Council, Lord Briggs noted that a just and equitable winding-up could be ordered where the company’s members had fallen out “in two related but distinct situations, which may or may not overlap.” First, a winding-up could be ordered to resolve a functional deadlock, “where an inability of members to co-operate in the management of the company’s affairs leads to an inability of the company to function at board or shareholder level” (a proposition which he traced back to In re Sailing Ship Kentmere Co [1897] WN 58). Secondly, it could arise where the company was a quasi-partnership and there had been an irretrievable breakdown in trust and confidence between the members “essentially on the same grounds as would justify the dissolution of a true partnership” (as exemplified in Harrison v Tennant (1856) 21 Beav 482; and see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, still the text book case on quasi-partnership). He distinguished between the two:

“The important potential distinction between the two types of breakdown case is this. If there is a complete functional deadlock, then a winding-up may be ordered regardless whether the company is a corporate quasi-partnership. But if the company is of that type, then a breakdown of trust and confidence may justify a winding-up even where there may not be a complete functional deadlock. In the former case winding-up is a remedy for paralysis. In the latter it is the response of equity to a state of affairs between individuals who agreed to work together on the basis of mutual trust and confidence where that trust and confidence has completely gone. But of course both may exist together, and a complete breakdown in trust and confidence may well be the cause of functional deadlock, in a two party quasi-partnership like the present.”

Lord Briggs found the approach of the Court of Appeal to have been flawed. He held that it was unnecessary to demonstrate complete functional deadlock to succeed in winding up the company; irretrievable breakdown of trust and confidence could suffice. Furthermore, the court held, it was not necessary in every case to prove all the indicia of a quasi-partnership set out in Ebrahimi. The Privy Council also found that the existence of another potential remedy did not amount to a reason for refusing the just and equitable winding up relief the petitioner had sought; indeed the buy-out remedy relied on by the Court of Appeal was not available in the absence of an unfair prejudice petition, which had not been before the court.

Accordingly the decision of the first instance judge was restored.

The decision of the Privy Council affirms the long-standing status of the judgment of Lord Wilberforce in Ebrahimi, and although the cases was one to which BVI law applied, Lord Briggs noted that UK case law was the primary source of authority for the scope of the jurisdiction in the BVI too.

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