Chu v Lau
| Jurisdiction | UK Non-devolved |
| Judge | Lord Briggs |
| Judgment Date | 12 October 2020 |
| Neutral Citation | [2020] UKPC 24 |
| Docket Number | Privy Council Appeal No 0021 of 2020 |
| Court | Privy Council |
| Date | 12 October 2020 |
Lord Hodge
Lord Briggs
Lady Arden
Lord Leggatt
Lord Burrows
Privy Council Appeal No 0021 of 2020
JUDGMENT
Appellant
Philip Jones QC Rosalind Nicholson Daniel Warents Renell Benjamin Sparsh Garg (Instructed by Walkers and Blake Morgan LLP)
Respondent
Richard Hacker QC John Carrington QC William Wong SC Michael Lok (Instructed by Charles Russell Speechlys LLP)
Lau Wing Yan (“Mr Lau”) and Chu Kong (“Mr Chu”) are experienced Hong Kong based businessmen with complementary skills and experience. They became friends and business colleagues, investing in a number of jointly owned commercial enterprises, mainly in shipping and logistics. In November 2009 they together set up Ocean Sino Ltd (“OSL”), a British Virgin Islands company in which they each owned one of the two issued shares. They were its only directors. OSL has a wholly owned subsidiary PBM Asset Management Ltd (“PBM”), a Hong Kong company. Again, Mr Lau and Mr Chu were its only directors.
OSL and PBM were Mr Lau's and Mr Chu's corporate vehicles for a joint venture with a state-owned entity of the People's Republic of China (“PRC”). The joint venture company was Beibu Gulf Ocean Shipping (Group) Ltd (“Beibu Gulf”), in which PBM held 49% of the shares. The remaining, and controlling, 51% was held by the PRC's corporate vehicle Beibu Gulf Holding (Hong Kong) Co Ltd (“PRC Holdco”). Both Mr Lau and Mr Chu were executive directors of Beibu Gulf, but a majority of the directors were appointees of PRC Holdco. Both Beibu Gulf and PRC Holdco were Hong Kong companies, and the intended business of Beibu Gulf was ship-owning, commodity trading and supply chain services all for dry bulk commodities.
In 2010 Beibu Gulf ordered a fleet of 8 dry bulk carriers from shipbuilders. Four were delivered in 2012–13 but the orders for the remainder were cancelled. The purchase prices had been funded by contributions from PBM and PRC Holdco and from bank lending.
From (at the latest) early 2014 the previously constructive relationship between Mr Lau and Mr Chu broke down. That led first to an ultimately abortive attempt to sever their many business relationships by agreement and then to multiple legal claims and cross-claims, mainly in the courts of Hong Kong. In May 2015 Mr Lau applied to the BVI High Court for the winding up of OSL on the just and equitable ground, alleging (i) an irretrievable breakdown of trust and confidence between him and Mr Chu, and (ii) functional deadlock in the management of OSL (and therefore PBM) both at board and shareholder level.
After a six day trial in May and June 2017, at which both Mr Lau and Mr Chu were cross-examined at length, Justice Roger Kaye QC granted the relief sought, finding that both Mr Lau's main allegations had been proved. At the end of a careful (and prompt) reserved judgment he said:
“I have no hesitation in finding that OSL (and thereby PBM) is in a completely hopeless state of irretrievable deadlock at board and shareholder level. Having seen and heard the two of them in the witness box and having regard to the evidence as a whole I can see absolutely no real prospect of Mr Lau and Mr Chu ever getting on together again in the future. They are hardly on speaking terms (save perhaps with a grimace). It is a true irretrievable breakdown. All trust and confidence between them has gone.”
On the order of Wallbank J made on 28 July 2017 liquidators were appointed over OSL.
In January 2020, on Mr Chu's appeal, the Court of Appeal of the Eastern Caribbean Supreme Court (Blenman, Michel and Thom JJA) unanimously reversed the judge and discharged the winding-up order made by Wallbank J. They held that the judge had made the following four errors:
(a) He had wrongly taken into account aspects of the dissension between Mr Lau and Mr Chu which occurred at the Beibu Gulf level, which ought not to be taken into account in assessing whether there was deadlock in OSL.
(b) He had failed to concentrate on the question whether OSL was deadlocked at the date of the filing of the application, rather than at the time of the hearing, and thereby failed to take into account evidence that Mr Lau and Mr Chu were able to negotiate and agree matters after May 2015, so that their breakdown in co-operation was not then irretrievable.
(c) He had failed to take into account the freedom of Mr Lau and Mr Chu to sell their shares in OSL as a means of avoiding deadlock.
(d) He had failed to consider alternative remedies reasonably available to Mr Lau, such as a buy-out, before ordering a winding up as a last resort.
The Court of Appeal therefore concluded that there had been no deadlock. Even if there had been, a winding-up was not the appropriate remedy.
Mr Lau appealed to the Board. In outline, he claims that there had been no basis for the Court of Appeal to interfere either with the essentially factual finding of deadlock by the judge, or with his exercise of discretion to make a winding-up order, rather than leave Mr Lau to some alternative remedy. On the specific errors identified by the Court of Appeal, Mr Lau submits as follows:
(a) The judge never lost sight of the need to examine whether OSL (and PBM) rather than Beibu Gulf were deadlocked, and the matters arising at the Beibu Gulf level on which the judge relied were relevant to the management (or lack of it) of the affairs and interests of OSL and PBM.
(b) There is no rule that grounds for a just and equitable winding up must be established as at the date of filing the application, separately from the date of the hearing. Even if there is such a rule, the judge had found that the grounds (deadlock and irretrievable breakdown of trust and confidence) were established as at the earlier date, and that there was ample evidence from which he did so.
(c) The judge had been aware that Mr Lau and Mr Chu were free to sell their shares in OSL, but that this was unlikely to secure for Mr Lau a fair price for his interest in the company.
(d) The judge had properly assessed alternative remedies available to Mr Lau and concluded that he was not acting unreasonably in pursuing a winding up instead.
Mr Lau added a separate appeal against the costs order made against him by the Court of Appeal. For his part Mr Chu sought to support the decision of the Court of Appeal on four additional grounds. Both parties presented their cases by distinguished teams of counsel, led for Mr Lau by Mr Philip Jones QC and for Mr Chu by Mr Richard Hacker QC. OSL was joined as a respondent but took no active part in the appeal.
The jurisdiction to wind up a BVI company on the just and equitable ground is entirely statutory. It closely follows the similar jurisdiction in the UK, which dates back to the mid-19th Century. The result is that the UK case-law is the primary source of authority for the scope of the jurisdiction, and for the principles upon which it is to be exercised, although the Board was helpfully referred to a wealth of additional authority from around the common law world, in jurisdictions which have broadly followed the same model.
Jurisdiction to wind up in the BVI is expressed in terms of a power of the court to appoint a liquidator, in the Insolvency Act 2003. By section 159(1) the Court may appoint the official receiver or an eligible insolvency practitioner as liquidator of a BVI company, on an application under section 162. That section provides, so far as is relevant, as follows:
“(1) The Court may, on application by a person specified in subsection (2), appoint a liquidator of a company under section 159(1) if
(b) the Court is of the opinion that it is just and equitable that a liquidator should be appointed …
(2) Subject to subsections (3), (4) and (5), an application under subsection (1) may be made by one or more of the following:
(c) a member; …”
Section 167(3) of the 2003 Act provides as follows:
“(3) Where an application to appoint a liquidator is made by a member under section 162(1)(b), if the Court is of the opinion that
(a) the applicant is entitled to relief either by the appointment of a liquidator or by some other means; and
(b) in the absence of any other remedy it would be just and equitable to appoint a liquidator; it shall appoint a liquidator unless it is also of the opinion that some other remedy is available to the applicant and that he is acting unreasonably in seeking to have a liquidator appointed instead of pursuing that other remedy.”
By section 160 of the same Act a liquidation commences upon the appointment of a liquidator rather than, as in the UK, upon the date of the presentation of the petition to wind-up, if an order to wind-up is subsequently made.
Remedies in the alternative to a just and equitable winding-up include relief for the company itself, available by means of a derivative action and relief available on proof of unfairly prejudicial conduct, under part XA of the BVI Business Companies Act 2004. Relief for unfair prejudice includes a court order for a buy-out, the appointment of a receiver or the appointment of a liquidator under section 159 of the 2003 Act, on the just and equitable ground in section 162(1)(b).
A just and equitable winding-up may be ordered where the company's members have fallen out in two related but distinct situations, which may or may not overlap. First, a winding-up may be ordered to resolve what may conveniently be labelled a functional deadlock. This is where an inability of members to co-operate in the management of the company's affairs leads to an inability of the company to function at board or shareholder level. Functional deadlock of this paralysing kind was first clearly recognised as a ground for a just and equitable winding-up by Vaughan Williams J in In re Sailing Ship Kentmere Co ...
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