Take 10

In this episode of our Take10 podcast, Partner William Peake is joined by our London Litigation team, Counsels Francesca Gibbons and Deirdre MacNamara, and Associate Joshua Shuardson-Hipkin, to discuss the inner workings of the Judicial Committee of the Privy Council.

Key Takeaways:

• The history of the Privy Council can be traced back to the Norman times during the 11th Century where petitions were brought before the Monarch to be either granted or denied. Over time, it was decided that a group of Privy Counsellors be formed to review the petitions and provide advice to the Monarch about the best decision to be made. The group still exists today and remains a formal body of advisors to the Monarch.
• Today, the Privy Council remains the final appellate court for many overseas territories including the BVI, Cayman and Bermuda.
• Unlike other courts in England and Wales, all proceedings are recorded and can be watched online.
• Our London Litigation team has been involved in a number of heavy weight disputes before the Privy Council, appearing as either offshore lawyers or Privy Council Agents, and are uniquely placed due to their proximity to the Court, allowing them to take charge of filings.
• The team is also a member of the JCPC User Group Committee, attended by key Privy Council Agents. The group discusses procedural matters with the Court, putting forward suggestion for areas of improvement which are then considered by the Registrar and the Chairman.
• The Privy Council has adapted to the remote working world as a result of COVID-19, with virtual hearings, electronic filings and bundles, and the utilisation of encrypted messaging platforms.

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In this episode of our Take 10 podcast, Litigation Partner William Peake joins Asia Managing Partner Ian Mann for an introduction and overview of The Offshore Litigation Blog, the platform that inspired the launch of our Take 10 podcast.

Key takeaways

• The blog establishes a sense of community within the global litigation team at Harneys by providing a collaborative platform for our litigation lawyers of all levels to showcase their expertise and knowledge to a wide audience around the world
• Our contributors are able to analyse complex cases and legislation and translate that into easy to read, digestible snippets of content that our audience, many of which are not lawyers, can identify with and understand 
• Content on the blog is often the first to market for some of the largest and most ground breaking offshore cases, many of which become re-published by leading legal publications
• The blog often highlights offshore and onshore experts through our QC Corner segment as well as the Take 10 podcast with guest speakers and authors, creating somewhat of a “think tank” where we share ideas about the trends and insights we see in the industry

Ian and William refer to Mr Edmund King QC during this podcast. This podcast was recorded prior to the very sad passing of Mr King over the Christmas period. Harneys was deeply saddened by this news and sends sincerest condolences to his family and friends. May he Rest in Peace. A link to his excellent article referenced in this podcast can be found here.

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On Season 3 of Take 10, we’re unravelling the complexities of the offshore litigation world. This season is packed with case law analysis, jurisdiction updates, as well as interviews with guest speakers and top legal experts who are at the forefront of legal developments in the offshore industry. Be sure to tune in each month for new episodes.

In this episode of our Take10 podcast, guest speaker Victor Joffe QC of Temple Chambers joins Ian Mann to discuss Chu v Lau [2020] UKPC 24, a case that considers the test for winding up a company on the just and equitable ground, with particular reference to deadlock. 

Key takeaways

• Chu v Lau raises a number of interesting points about winding up on the just and equitable ground. 
•  In order to wind up a company on the just and equitable ground, certain conditions must be met, one of which is deadlock. There are two types of deadlock:
• Management (or functional) deadlock: Where two shareholders who are directors of a joint venture fall out, and as a result, are unable to agree on company management decisions, preventing the company from operating successfully. This type of deadlock will cause the court to wind up the company regardless of whether the individuals are in a quasi-partnership.
• Quasi-partnership deadlock: Where there is a complete failure of mutual trust and confidence. In this scenario, a winding up may be justified due to the failure of mutual trust and confidence, even though the underlying company continues to operate successfully and generate profits. 
• There was also a debate about whether or not the behaviour complained of should be considered at the date of filing or at the date of the hearing. Section 162(1)(b) of the BVI Insolvency Act is in the present tense and therefore the court should consider whether there is deadlock at the time of the hearing, rather than at the date of the filing. 
• When dealing with a quasi-partnership, it is the relationship between the quasi-partners that reveals the extent to which the necessary basis of trust and confidence has evaporated. Therefore, no aspect of a business relationship is irrelevant. In other words, all grievances within the relationship are relevant to the breakdown in trust and confidence. As a result, OSL was considered to be a quasi-partnership company, as its management included the management of the affairs of its wholly owned subsidiary, PBM, and in turn, Beibu Gulf. Essentially, the deadlock that occurred within Beibu Gulf could be relied upon to wind up OSL. 
• Unfair prejudice vs just and equitable grounds
• One could prove the breakdown of mutual trust and confidence without proving unfair prejudice in the management of the company. Unfair prejudice requires “the affairs of the company” to be unfairly prejudicial to its members, which is potentially more limited. 
• When applying for a winding up, more behaviour can be taken into account when applying on just and equitable grounds in a quasi-partnership company than winding up on the grounds of unfair prejudice, ie more than just “the affairs of the company”.
• Alternative remedies
• In the BVI, on a just and equitable winding up, a buy-out remedy cannot be obtained. In the Cayman Islands however, a buy-out remedy is possible. 
• Had an unfair prejudice claim been filed instead of a just and equitable winding up, a buy-out remedy could have been obtained. 

Read more about Chu v Lau in this blog post.

In this episode of our Take10 podcast, Ian Mann is joined by guest speaker Victor Joffe QC of Temple Chambers to discuss the UK Supreme Court case of Sevilleja v Marex Financial Ltd [2020] UKSC 31, a case that looked at whether the rule against reflective loss prevented creditors of a company from claiming directly against a third party for asset-stripping the company.

Key Takeaways:

Sevilleja v Marex – The facts:

• Mr Sevilleja controlled two BVI companies which were sued by Marex Financial Ltd. In the Court of Appeal, Marex was successful in obtaining a judgment of over US$5 million and costs. A copy of the draft judgment was provided to both parties, prior to the final judgment due to be handed down a few days later. During those days, Mr Sevilleja caused his BVI companies to transfer over US$9.5 million out of their accounts and subsequently put the companies into liquidation, making it impossible for Marex to receive payment on the judgment debt.
• As a result, Marex brought claims against Mr Sevilleja, seeking damages for violating Marex’s rights in avoiding the judgment and other intentional economic torts.
• Mr Sevilleja’s defence stated that Marex’s claims were barred by the principle of reflective loss.

Reflective loss:

• The reflective loss principle states that if a company suffers a loss, only the company can sue in respect of that loss. The shareholders cannot sue in respect of the loss because the loss suffered is not a personal loss, but a reflection of the loss suffered by the company.
• In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, the Court of Appeal held that reflective loss applied to claims brought by shareholders in respect of diminution in the value of their shares, and diminution in the flow of distributions, caused by a wrongdoer who had acted in breach of duty both to the company and to the shareholders.
• In a number of subsequent cases, Johnson v Gore Wood & Co [2000] UKHL 65 has been relied upon to justify an expansion of the reflective loss principle, particularly due to Lord Millet’s speech. For example, the rule was expanded to apply to shareholders who are creditors (as seen in Gardner v Parker [2004] 2 BCLC 554) and then to apply to creditors who are not shareholders, as seen in the Court of Appeal in Sevilleja v Marex.
• Ultimately, the Supreme Court in Sevilleja v Marex pairs back the reflective loss rule to its original and limited scope as decided originally in the decision of Prudential - making it clear that reflective loss only applies to diminution in shareholdings and diminution in the flow of distributions. It does not apply any further and there are no exceptions to the rule. It does not prevent creditors of a company from claiming directly against a third party for asset-stripping the company.

In this episode of our Take10 podcast, Paula Kay joins Ian Mann to discuss privatisation, the process by which a company transfers from public to private ownership and control. 

Key Takeaways

Why privatise?

• Given the current economic and geopolitical climate, publicly listed companies are facing great pressure and are looking for ways to either exit from their current stock exchange and relist elsewhere, or to exit the stock exchanges completely.
• Increased reporting requirements as a result of the US-China trade war has also played a role in many organisations’ desire to privatise.

 Options for privatisation for a Cayman Islands company 

• Standard merger process in which a public company merges with a private company in order to come off the stock exchange. 
• Privatisation via a scheme of arrangement has a similar time frame to a standard merger, but does not require a fair value pay-out to dissenting shareholders. However, a majority in number and 75 per cent present and voting is needed, which may be challenging to obtain.
• Mergers in accordance with Part XVI s233 only require a special resolution (usually 66 per cent), which may be easier to obtain. However, dissenting shareholders have the right under s288 to seek the Courts assistance to determine a fair value. Should the Court decide that the value of the shares at the time of the merger was not fair, the dissenters are entitled to an uplift. 
• Part XVI s233(7) is an exception to the standard merger process, referred to as a Short Form Merger, which is a combination of a Squeeze Out (where 90 per cent of the shares are acquired) and a merger to follow. As 90 per cent of the shares are owned, there is no requirement for a meeting of the members as there is no need for a special resolution to be passed, resulting in a compulsory buyout of the remaining shares. In this event, dissenting shareholders do not have the opportunity to provide notice or to seek the Courts assistance to determine fair value. 
• Regardless of the way in which a company privatises, financial advice from an independent third party and an independent special committee to assess the merits of the merger are essential to ensure that the deal is the correct price for the shareholders. 

In this episode of our Take 10 podcast, Andrew Johnstone and Ian Mann discuss the decision in CEFC Shanghai: the first PRC office holder to be recognised under the common law in Hong Kong.

Key Takeaways:

CEFC Shanghai

• CEFC Shanghai was a PRC company in Administration. The Administrators sought common law recognition in Hong Kong in order to stop a garnishee order nisi from being made final.
• The House of Lords decision of Galbraith v Grimshaw [1910] AC 508 not followed, but obiter dicta in Privy Council decision of Grupo Torras SA v Al-Sabah [2014] 2 CLC 636 followed.
• The decision in CEFC Shanghai was consistent with established principles of common law recognition.

Cross border recognition: BVI vs Cayman Islands

• In the BVI, Part XIX of the BVI Insolvency Act permits orders in aid of foreign insolvency proceedings at the request of a foreign liquidator, but only to representatives appointed in 9 specific jurisdictions, of which the PRC is not included.
• Could the common law power of recognition be relied upon by PRC Administrators instead? The answer is: “maybe”, but the BVI Court of Appeal will have to clarify some conflicting first instance decisions.
• The Cayman Islands does have a statutory provision for recognition of foreign companies under Part XVII of the Cayman Islands Companies Law.

In this episode of our Take 10 podcast, Julie Engwirda and Ian Mann discuss directors’ duties and obligations where a company is experiencing financial pressure. 

Key Takeaways: 

• 2020 has seen the global economy affected in unprecedented ways. With major loss of revenue, global stock market crashes, and millions of jobs affected, directors across all sectors are having to reassess their businesses and plan for an uncertain future. 
• Directors will need to adapt to the changing landscape to ensure survival of their businesses, with an emphasis on maximising cash flow whilst minimising expenses. 
• Having cash flow issues does not necessarily mean a company is insolvent. Many common law jurisdictions give statutory guidance to directors when considering solvency issues. 
• When directors know or ought to know that the company is, or is likely, to become insolvent, they owe duties to creditors (instead of shareholders). 
• Risks:  
• BVI: insolvent trading. 
• Cayman Islands: fraudulent trading. 

In this episode of our Take10 podcast, Ian Mann and Dayton Riddle discuss whether a board of directors of a Cayman Islands company has the right to petition to wind up the company without shareholder approval, for restructuring or insolvency purposes.

We hope you have enjoyed our Take 10 series this year and we look forward to providing you with more insightful podcasts in the new year.

Stayed tuned and thanks for listening!

In this episode of our Take 10 podcast, Ian Mann and Julie Engwirda discuss the shareholder remedy of derivative actions, particularly multiple derivative actions in the British Virgin Islands.