BVI Commercial Court confirms just and equitable winders as a tool for combatting fraud
In the recent decision of the BVI Commercial Court in Hydro Energy Holdings B.V. v Zhaoheng (BVI) Limited (BVIHCOM2021/0091), the Court ordered the winding up of a BVI company on just and equitable grounds which followed the continuation of the appointment of provisional liquidators over the company which we reported in our previous blog BVI Court has the power.
When deciding to continue the appointment of provisional liquidators, the Court decided that (i) provisional liquidators were necessary to maintain the value of the assets owned by the company, which included protecting assets of subsidiaries (many indirectly owned by the company); and (ii) despite arbitration proceedings having already been commenced in Hong Kong, the BVI court still had jurisdiction to determine the winding up application. The court has now reaffirmed its earlier decision by ordering the final winding up of the company.
The just and equitable winding up application was brought by Hydro Energy, a minority shareholder of the company which is the holding company of the Zhaoheng Group, on the basis of alleged serious mismanagement and misappropriation of the Group’s assets by the Group’s ultimate majority beneficial owner and effective controller. The allegations made against the ultimate majority beneficial owner included that he had diverted substantial funds from the Group to non-Group companies under his actual or de facto control for the ultimate benefit of himself and/or his family members to the detriment of the minority shareholders and had taken (and was continuing to take) steps to conceal his wrongdoing.
In circumstances where the allegations of wide-ranging and serious wrongdoing and mismanagement were uncontested (despite the appointment of the PLs having previously been challenged), the Court was able to deal very swiftly with the substantive winding up application. Its decision to wind up the company demonstrates that it agreed that this was a clear case in which liquidators should be appointed at the holding company level on just and equitable grounds.
The decision also confirms that there was utility in winding up the BVI holding company despite a Hong Kong company, which is interposed between the BVI holding company and the Group operating companies, being placed into insolvent liquidation. Hydro Energy had submitted that if liquidators were not appointed at the BVI level, then the majority owner and controller of the Group would have been able to regain control of the BVI company and used it to influence the conduct of the Hong Kong insolvency. Further, if and when any recoveries flowed up from the operating companies to the holding companies, it would have put such funds at risk of further misappropriation.
The decision confirms that the BVI court’s jurisdiction to wind up companies on just and equitable grounds is a flexible and important remedy in the context of corporate fraud, and provides an alternative route to redress for shareholders who hold their interest in a group via BVI investment vehicles (as discussed further here).
Harneys acted for the successful applicant, Hydro Energy.