In the fifth episode of this season’s Offshore Litigation Take 10 podcast, guest speaker Victor Joffe QC of Temple Chambers joins Ian Mann to discuss Chu v Lau  UKPC 24, a case that considers the test for winding up a company on the just and equitable ground, with particular reference to deadlock.
Click below to listen.
Chu v Lau - Brief facts
- Mr Lau and Mr Chu, both from Hong Kong, together set up a British Virgin Islands company called Ocean Sino Limited (OSL) which holds 100% of a Hong Kong company called PBM Asset Management Ltd (PBM). PBM entered into a joint venture with a PRC company called Beibu Gulf Holding (Hong Kong) Co Ltd (PRC Holdco) which held a controlling 51% of the joint venture company called Beibu Gulf Ocean Shipping (Group) Ltd (Beibu Gulf). PBM held the remaining 49%.
- In 2014 the relationship between Mr Lau and Mr Chu broke down, resulting in Mr Lau applying to the BVI High Court to wind up OSL (and therefore PBM) on just and equitable grounds.
- After a 6-day trial, Mr Lau’s application was successful with Justice Roger Kaye QC granting the winding-up relief. Mr Chu appealed and the decision was unanimously overturned and the winding-up order was discharged. The matter then went to the Privy Council which found that the Court of Appeal was wrong on its findings of law.
- Chu v Lau raises a number of interesting points about winding up on the just and equitable ground.
- In order to wind up a company on the just and equitable ground, certain conditions must be met, one of which is deadlock. There are two types of deadlock:
- Management (or functional) deadlock: Where two shareholders who are directors of a joint venture fall out, and as a result, are unable to agree on company management decisions, preventing the company from operating successfully. This type of deadlock will cause the court to wind up the company regardless of whether the individuals are in a quasi-partnership.
- Quasi-partnership deadlock: Where there is a complete failure of mutual trust and confidence. In this scenario, a winding up may be justified due to the failure of mutual trust and confidence, even though the underlying company continues to operate successfully and generate profits.
- There was also a debate about whether or not the behaviour complained of should be considered at the date of filing or at the date of the hearing. Section 162(1)(b) of the BVI Insolvency Act is in the present tense and therefore the court should consider whether there is deadlock at the time of the hearing, rather than at the date of the filing.
- When dealing with a quasi-partnership, it is the relationship between the quasi-partners that reveals the extent to which the necessary basis of trust and confidence has evaporated. Therefore, no aspect of a business relationship is irrelevant. In other words, all grievances within the relationship are relevant to the breakdown in trust and confidence. As a result, OSL was considered to be a quasi-partnership company, as its management included the management of the affairs of its wholly owned subsidiary, PBM, and in turn, Beibu Gulf. Essentially, the deadlock that occurred within Beibu Gulf could be relied upon to wind up OSL.
- Unfair prejudice vs just and equitable grounds
- One could prove the breakdown of mutual trust and confidence without proving unfair prejudice in the management of the company. Unfair prejudice requires “the affairs of the company” to be unfairly prejudicial to its members, which is potentially more limited.
- When applying for a winding up, more behaviour can be taken into account when applying on just and equitable grounds in a quasi-partnership company than winding up on the grounds of unfair prejudice, ie more than just “the affairs of the company”.
- Alternative remedies
- In the BVI, on a just and equitable winding up, a buy-out remedy cannot be obtained. In the Cayman Islands however, a buy-out remedy is possible.
- Had an unfair prejudice claim been filed instead of a just and equitable winding up, a buy-out remedy could have been obtained.
Read more about Chu v Lau in this blog post.