Unfair prejudice claims have been commonplace in the British Virgin Islands since the introduction of bespoke provisions in the BVI Business Companies Act (16/2004) and have all but replaced old-fashioned just and equitable winding-up petitions. However, in Wang Zhongyong v Union Zone Management Limited (BVIHCMAP 2013/0024) the Court of Appeal for the first time considered a standalone just and equitable petition brought under Section 162 of the Insolvency Act (5/2003), rather than alongside an unfair prejudice claim (although that had been argued at first instance).
An offshore structure had been put in place to hold the shares in two valuable pharmaceutical companies based in China. In 2011 the minority shareholders in Union Zone, the principal BVI company within the structure, brought a claim alleging that the affairs of Union Zone were being conducted in a manner which was unfairly prejudicial to them. The minority shareholders claimed that there had been a common understanding which led to the creation of a quasi-partnership between the shareholders and that the sole purpose for which Union Zone had been created – namely, to obtain a public listing – had failed.
Following the English decisions in Ebrahimi v Westbourne Galleries Ltd ( AC 360) and O'Neill v Phillips ( 1 WLR 1092), the Court of Appeal's decision suggests that it will not interfere with commercial transactions and relations by winding up companies on just and equitable grounds without good cause. However, the Court of Appeal noted that, as in England, the grounds for winding up a company on this basis might include exclusion from the management of the company in circumstances of a quasi-partnership, loss of substratum or deadlock (although this list is not exhaustive).
The Court of Appeal also quoted with approval Lord Wilberforce's oft-cited statement in Westbourne Galleries that "something more" is required to engage equitable principles. In this regard the mere breakdown in the relationship between shareholders is not normally sufficient. In order for this to justify winding up the company, the breakdown must lead to a deadlock on the board or between the shareholders in a general meeting or constitute a breach of some underlying agreement as to the shareholders' rights of participation in the management of the company.
On the facts of the case, the trial judge considered that no quasi-partnership had been created and the Court of Appeal upheld this finding. The Court of Appeal also considered whether the sole purpose for which Union Zone had been established (ie, to enable a public listing) had failed. It was noted that impossibility or frustration of purpose, if proved, would be grounds for winding up a company on just and equitable grounds. However, on the facts of Union Zone, although no public listing had been achieved, the Court of Appeal agreed with the trial judge's finding that although the restructuring (of which the planned listing was to be part) "did not produce the fruits which it was hoped… that it would, but that goes to commercial disappointment, not to violation of any agreement reached between co-venturers". The Court of Appeal considered that the public listing was not in any event the sole purpose for which Union Zone was incorporated.
Finally, counsel for Union Zone sought to suggest that the Court of Appeal should:
"[look to the] business realities of the situation and must not be confined to a legalistic view, in circumstances where you have a holding company and a subsidiary. In an appropriate case, the conduct of the subsidiary or one of its directors who happens to be a director of the holding company may be regarded as the affairs or conduct of the holding company."
The Court of Appeal referred to the ratio in Rackind v Gross ( 1 WLR 3505) and considered that although this principle may be applied in certain situations, it was of no application in Union Zone. In this regard, it noted that Union Zone was not the holding company of the relevant entity and that there was no conduct complained of at the level of Union Zone itself which was said to be prejudicial to the appellants.
It is clear that the Court of Appeal will follow the approach outlined by the English authorities on just and equitable winding up and will utilise it only as a remedy of last resort. This is consistent with the approach taken in other major BVI decisions, such as Aris v Quantek (BVIHCOM 2010/0129). In Aris, an investor in a BVI mutual fund sought to wind it up on just and equitable grounds because it had suspended redemptions and effectively stopped acting as a hedge fund. The Commercial Division declined to appoint liquidators where the company was still operative, even though it was in run-off.
However, plenty of remedies remain available to oppressed shareholders, which can also bring a claim for unfair prejudice under Section 184I of the Business Companies Act. On the facts of Union Zone, the minority shareholders' claim under Section 1841 was not established. The minority did not seek to appeal this finding, but instead appeared to switch the claim to seek a just and equitable winding-up on appeal. However, if the minority shareholders had been able to establish unfair prejudice, then the court could have relied on Section 184I, which provides the discretion to grant "such order as [the court] thinks fit" in such circumstances. These can include ordering one shareholder to buy the other shareholders' shares, regulating the future conduct of the company or requiring the payment of compensation.
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