In Wang Zhongyong -v- Union Zone Management Ltd [BVIHCMAP 2013/0024] ("Wang"), the Eastern Caribbean Court of Appeal ("ECCA") has had its first opportunity to review the legal principles which apply where a shareholder of a BVI company seeks a self-standing order winding up the company on the just and equitable ground under s.162(1)(b) of the Insolvency Act 2003 ("IA"). Hitherto, all the cases considered by the ECCA where such relief has been claimed have been cloaked in an application under s.184I of the Business Companies Act ("BCA"), the "unfair prejudice" provision, to which different considerations apply.
The Court's jurisdiction to appoint a liquidator of a British Virgin Islands ("BVI") company on the application of a member is derived from IA s. 162(1) which permits the Court to make such an appointment either (a) if the company is insolvent (the member first having obtained the permission of the Court to proceed on those grounds under IA s.162(3)), or (b) if the Court "is of the opinion that it is just and equitable that a liquidator should be appointed"1.
The IA does not prescribe the factors to which the Court may look in forming its opinion under IA s.162(1)(b). In the absence of any local legislation or case law to direct its approach, the BVI Court will look to the common law of England2 and in Wang, the ECCA accordingly looked to English case law for guidance as to what constitutes "just and equitable" for the purposes of BVI law.
The ECCA identified the central question in such cases as being the resolution of the interplay between the strict legal rights and obligations of the members of a company, as set out in the company's Memorandum and Articles of Association, any applicable shareholder agreements and the BCA, and equitable principles which superimpose a requirement of "fairness" over and beyond those strict legal rights. In formulating its own approach to this issue, the ECCA echoed the expression of principle in the speech of Lord Hoffman in O'Neill - v- Phillips3, and said this:
"The relationship and rights of shareholders of a company inter se, is a contractual one as set out in the articles of association of the company and any applicable and enforceable shareholders' agreement, supplemented by relevant statutory provisions. It is a fundamental principle of company law that the majority rules. This means that the will of the majority, as expressed by and through the exercise of their voting power in a general meeting, or by any other method of voting sanctioned by the articles, but subject to such constraints or limitations on voting as may be prescribed under any applicable shareholders' agreement, will generally prevail. This is the legal position in which any minority find themselves. The principle of 'majority rule' is subject to certain exceptions or limitations recognised by statute, for example, where the act or decision of the majority is ultra vires or amounts to an oppression of the minority or unfairly prejudices the minority or the decision or action of the majority is found to be unjust and inequitable....It is a general principle that courts must be cautious or slow to apply equitable principles of fairness to commercial transactions and relations".
As to the circumstances in which equitable considerations may fall to be applied to the relationship between shareholders, the ECCA emphasised that the role of the Court was not to impose its own concept of what is fair on the parties and their transactions, but rather to apply the concept of fairness judicially having regard to the particular context. In this, the ECCA turned to Lord Wilberforce's speech in Re Westbourne Galleries Ltd and, in particular, to the passage where Lord Wilberforce considers the meaning of the words "just and equitable"4 :
"The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so, whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."
Accordingly, against the background of a commercial relationship, the ECCA concluded, "something more" was required before the Court would consider principles of equity to be engaged. As to when that "something more" might be found, the ECCA again turned to the speech of Lord Wilberforce in Re Westbourne Galleries Ltd and quoted, with approval, the following passage from that speech5 :
"It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."
On this footing, the ECCA concluded that it must follow that the breakdown in the relationship between shareholders is not, of itself, justification for winding up a company. For such an event to trigger equitable considerations so that a winding up of the company must ensue, such a breakdown must either represent or lead to deadlock on the board or between the shareholders in a general meeting, or amount to a breach of some underlying agreement, express or implied, between the shareholders as to their rights inter se or the extent to which they are to participate in the management and decision-making of the company, or entail some unauthorized change in the type of business or activity for which the company was incorporated in the first place. These three circumstances, expulsion or exclusion from the management of the company in circumstances of a quasi-partnership, loss of substratum and deadlock, were those which the Court observed, while by no means exhaustive of the circumstances in which the just and equitable principle will found a winding up Order, were the categories which emerge from the cases as sufficient to support an application of the just and equitable principle.
Wang represents useful guidance for members of a BVI company involved in a shareholder dispute as to the approach that the BVI Courts will adopt in considering an application to wind up on the just and equitable ground. Those members, and their advisors, can now draw confidently not only on over 40 years of English precedent but on BVI endorsement of the approach embodied in that precedent in determining the most appropriate framework within which to bring their claim before the BVI Courts.
Footnotes
1 S.162(1)(b)
2 Common Law (Declaration of Application) Act, 1705
3 [1999] 1 WLR 1092 at 1098H-1099A: "First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law."
4 [1973] AC 360 at 379
5 [1973] AC 360 at 379
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