Stephen Murphy considers the judgment handed down by The Privy Council on 12 October 2020 that usefully confirms the circumstances in which the Court will find that it is appropriate to wind up a company in a ‘deadlock’ situation.
The judgment in Chu v Lau  UKPC 24 was referred to the Privy Council from the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands (“BVI”)) and dealt with various points of law relating to shareholder disputes.
The company in question, Ocean Sino Limited (OSL), registered in the BVI, was owned by Mr Chu and Mr Lau as 50/50 shareholders and was operated as a quasi-partnership. The dispute arose when Mr Lau asserted that certain sums of money were loans that should be repaid to OSL by a subsidiary, whereas Mr Chu asserted that the money was intended to be working capital, and therefore no demand for repayment should be made.
The parties fell out over this, and other matters, to the extent that, having failed to separate their business interests, Mr Lau applied to the BVI Commercial Court in 2015 to wind up OSL on the ground that the company was in functional deadlock. That application was granted at first instance but overturned on appeal and then referred to the Privy Council, which agreed with the Judge at first instance on several points of law and confirmed that there are two separate grounds on which a company can be wound up on a just and equitable basis:
- Where the shareholders are unable to co-operate in the management of the company, causing it to effectively cease functioning at board or shareholder level; or
- Where there is an irreparable breakdown in the relationship of trust and confidence between the shareholders if the company operated as a quasi-partnership.
Whilst this is a remedy of last resort and the Courts generally try to avoid it, this is an important reminder that, if the relationship between shareholders does break down beyond repair, the Court can ultimately order a company to be wound up. Such a litigious move obviously has far-reaching consequences for shareholders, directors and employees alike.
The best way to avoid such a situation arising is to have a shareholders’ agreement which:
- confirms whether the relationship between shareholders is a quasi-partnership – this is important as it may extend the scope of the Court’s ability to wind up a company, although the Court will always look behind the documents to determine the true position; and
- provides a dispute resolution or exit mechanism in a deadlock situation so that an alternative remedy to winding up is available, ultimately allowing the company to survive.
Duncan Hope, partner at Irwin Mitchell and expert in shareholder disputes commented as follows:
“The Court will have regard to the quasi-partnership operation of the company in question, and this should not be dismissed; such a relationship between the shareholders will likely persuade a Court to grant relief to quarrelling shareholders including winding up the company on just and equitable grounds. To have clear parameters set out in a shareholders’ agreement will avoid the need to defer to the Court to resolve such issues.”
Should you have any queries in relation to shareholder agreements or shareholder disputes, please do not hesitate to contact us at Stephen.firstname.lastname@example.org.