Winding up petitions upon just and equitable grounds

The case: Chu v Lau [2020] UKPC 24

The Appellant and the Respondent were equal shareholders of Ocean Sino Limited (OSL), a company registered in the British Virgin Islands. OSL operated as a quasi-partnership.

OSL was the sole shareholder of a Hong Kong subsidiary, PBM Asset Management Limited.   PBM also owned 49% of the shares in another Hong Kong company, Beibu Gulf Ocean Shipping (Group) Limited. The other 51% was originally held by a Chinese stated-owned holding company.

Over a period of five years, the relationship between the Appellant and the Respondent deteriorated irreconcilably. As a result, in May 2015, the Appellant applied to the British Virgin Island Commercial Court with a petition to wind up OSL on the ground that it was deadlocked.

The Court in the first instance found, as of the date of trial, the deadlock between the parties to be irreconcilable. The judge did find that both parties were to blame for this deadlock, albeit it the Respondent more so. The Judge ordered Joint Liquidators to be appointed over OSL.

The Respondent appealed to the Eastern Caribbean Court of Appeal where the decision in the trial was overturned. The Court of Appeal held that there were alternative remedies available to the parties and that the trial judge should not have ordered OSL to be wound-up. Instead, the trial judge should have ordered the Respondent to buy-out the Appellant’s shares in OSL.

The JCPC have now overturned the Court of Appeal’s decision and found that the trial judge had correctly found that there was an irreconcilable deadlock between the parties. In doing so, the JCPC have clarified a number of points of law relating to winding up petitions upon just and equitable grounds, which can be read in full in the published judgment.

Of particular interest was Lady Arden’s judgment. Lady Arden provided helpful commentary on the different meanings attached to “deadlock” and the relationship of deadlock to the just and equitable jurisdiction.

Lady Arden also emphasised the importance, in this case, of OSL being a quasi-partnership. Not only was OSL deadlocked, but the Appellant was excluded from participation in the management of OSL. OSL’s articles of association did not give the Appellant a right to participate in management. However, the finding by the Board that OSL was a “quasi-partnership” meant that the court also had to have regard to the equitable obligations which the Appellant and Respondent owed to each other. Therefore, it was held that the judge in the first instance was correct in finding that the application for winding up succeeded having regard to the just and equitable principles.

This successful appeal will no doubt provide useful reading to those practitioners advising shareholders in dispute.