Palmavon J. Webster v Sea Island Realties Ltd

• Jurisdiction: Anguilla
• Court: Court of Appeal (Anguilla)
• Judge: Bennett JA
• Judgment Date: 22 March 2023
• Judgment citation (vLex): [2023] ECSC J0322-2
• Docket Number: AXAHCVAP2021/0003

Between:

Palmavon J. Webster

Appellant

and

[1] Sea Island Realties Limited

[2] John O. Dyrud ((as a shareholder and director of Sea Island Realties Limited)

Respondents

Before:

The Hon. Mde. Louise Esther Blenman Justice of Appeal

The Hon. Mr. Mario Michel Justice of Appeal

The Hon. Mr. Sydney A, Bennett, KC. Justice of Appeal [Ag.]

AXAHCVAP2021/0003

THE EASTERN CARIBBEAN SUPREME COURT

IN THE COURT OF APPEAL

Civil Appeal — Winding up proceedings — Application by shareholder to wind up company on just and equitable ground — Section 217 (1) (a) (ii) of the Companies Act of Anguilla — Arbitration Award — Whether the learned judge misunderstood and misinterpreted the Arbitration Award between the parties — Breakdown of trust and confidence — Quasi Partnership — Deadlock in management of company — Whether the learned judge erred in fact and/or law in finding that there is a functional deadlock of the parties — Whether the learned judge erred in finding that the substratum of SIRL was gone — Alternative remedies to a winding up order — Exercise of Judicial discretion — Whether learned judge erred in the exercise of his discretion — Approach of appellate court to evaluations of fact

The appellant Ms. Palmavon J. Webster (“Ms. Webster”) and the second-named respondent Mr. John O. Dyrud (“Mr. Dyrud”) each own fifty percent of the shareholding of the respondent company Sea Island Realties Limited (“SIRL”). Ms. Webster and Mr. Dyrud were married in 1986 but their marriage broke down in about 1991. This breakdown notwithstanding, they continued to enjoy a cordial relationship and in 1992 Mr. Dyrud joined Ms. Webster's law practice in Anguilla.

On 18 ^th January 1993 Ms. Webster and Mr. Dyrud executed a Partnership Agreement by which they established the law firm of Webster and Dyrud (later renamed Webster Dyrud Mitchell “WDM”). The fixed term of the WDM partnership expired in 2002 but thereafter and for several years it continued harmoniously as a partnership at will. Ms. Webster and Mr. Dyrud organized their business affairs as joint ventures during the continuance of the partnership and used corporate vehicles to transact their business. Their professional business was carried out by means of the First Anguilla Trust Company Limited (“FATCL”) and the law firm WDM. Two such vehicles were the respondent company SIRL and WDM Limited.

SIRL was incorporated by Ms. Webster in 1988 with only one issued share held by her. The sole asset of the company is a parcel of land of land in Anguilla which is 1.47 acres in extent and is more particularly described as Registration Section East Central Block 89319 Parcel 109 (“Parcel 109”). That land was acquired in 2002 the year before the commencement of the partnership arrangements between Mr. Dyrud and Ms. Webster and prior to Mr. Dyrud's acquisition of an interest in the Company. The business relationship between Ms. Webster and Mr. Dyrud began to deteriorate in or about late 2006. The disputes were in relation to the WDM Partnership, FATCL, and related entities such as WDM Limited and SIRL.

In or about May 2007 Mr. Dyrud withdrew from the WDM practice. Ultimately, the matters in dispute were resolved by binding arbitration between them. The Arbitration Award was published by the arbitrator on 2 ^nd November 2016 (amended on the 9 ^th May 2017). Mr. Dyrud then sought an order for the winding up of SIRL pursuant to Section 217 (1) (a) (ii) of the Companies Act. Mr. Dyrud pursued a winding up of the Company on the basis of just and equitable grounds, claiming that the disputes and differences between Ms. Webster and himself as well as the ensuing litigation has caused the relationship between them to deteriorate to a point where there was an irreversible breakdown of mutual trust and confidence between them. Ms. Webster opposed the petition. Her position was that SIRL was not a quasi-partnership company. It had been incorporated prior to the commencement of any quasi-partnership between Mr. Dyrud and herself and had been incorporated by her primarily for the purpose of transacting real estate business and thereafter for holding her personal and family assets.

Ms. Webster further claimed that Mr. Dyrud, by virtue of his membership as a partner in WDM (the law firm) and other related entities, derived a benefit from the loans for which Parcel 109 stood as security.

The matter was heard on 4 ^th June 2020. In those proceedings Mr. Dyrud urged that SIRL was one of the corporate vehicles through which Ms. Webster and himself had conducted their business affairs in quasi partnership with each other. He further argued that the Partnership Withdrawal Agreement and the arbitration proceedings that foreshadowed the Arbitration Award had eroded the underlying basis upon which the parties had come together for a common purpose, and which utilised a corporate structure that employed several corporate vehicles to realise the purpose of their quasi-partnership.

The learned judge in a decision dated 5 ^th January 2021 granted the petition for the winding up of the Company and ordered that a liquidator be appointed for the purpose of dissolving the Company in accordance with the provisions of the Companies Act. Ms. Webster being dissatisfied with the decision in the court below, appealed.

The main issues that arise for determination on this appeal are: (i) Whether the substratum of SIRL was gone and there was a frustration of purpose in the circumstances; (ii) Whether Mr. Dyrud derived any benefit from the use of SIRL's property as security for loans; (iii) Whether there was a state of deadlock in the management and affairs of SIRL; and (iv) Whether the learned judge erred in the exercise of his direction in ordering the winding up of SIRL.

Held: dismissing the appeal and ordering the appellant to pay the second respondent's costs, such costs to be assessed by a Judge or Master of the High Court if not agreed within 28 days of the date of this judgment that:

• 1. The fact that the company is not presently carrying out the main activity for which it was originally incorporated is not determinative of whether it has lost its substratum. However, where the common intention and understanding of the parties, upon which they both agreed, to carry on the business is no longer possible and it can no longer serve the principal purpose for which it was agreed, the substratum will be frustrated.

  Eric Duneau v Klimt Invest SA and others [2022] EWHC 596 (Ch) considered.

• 2. An examination of the Arbitral Award shows that the issue which the arbitrator had been called upon to resolve was whether and to what extent Mr. Dyrud had any liability for indebtedness incurred by the WDM partnership and secured by charges placed on the property of related entities such as WDM Limited or SIRL following his retirement. The arbitrator found that any liability that Mr. Dyrud might have had for any indebtedness of the partnership was proscribed by virtue of Clause 1.3 of the Partnership Withdrawal Agreement. Therefore, the submission made on behalf of the appellant that in arriving at his decision, the learned Judge had misinterpreted or had failed to properly consider the Arbitration Award is rejected.

• 3. When determining whether or not a company could be characterised as a quasi-partnership company or whether a petitioner was or had become a quasi-partner, the court looks through the various legal entities used by the parties to structure their dealings, to the core elements of the underlying business relationship. One of the elements required is that there be an association formed or continued on the basis of a personal relationship, involving mutual confidence. It is the existence of a personal relationship with the necessary character of confidence that is the foundation for equitable obligations. In evaluating the evidence relied upon to demonstrate a personal relationship of mutual confidence, the court should focus on the substance, not the form, of the parties' relationship. SIRL was clearly a quasi-partnership company because it was an association continued on the basis of a personal relationship, involving mutual confidence or understanding. The learned judge did not err and was right in his determination that SIRL was and had been operated by the parties as a quasi-partnership company.

  Lau v Chu [2020] 1 W.L.R. 4656 applied; Re Edwardian Group Limited [2018] EWHC 1715 applied; Croly v Good and others [2011] BCC 105 applied.

• 4. Functional deadlock occurs when because of the inability of members to cooperate, the company is unable to function at board or shareholder level. In assessing whether a quasi-partnership is deadlocked it is however permissible to consider not only matters concerning aspects of the business operations or assets of the company upon which the parties were already deadlocked, but specific disputes which were likely to arise between the parties relating to important aspects of the company's business or assets and which would likely result in deadlock. A deadlock however is not established merely because the relationship between quasi-partners has deteriorated to such an extent that they may well be unable to agree generally on matters which had not yet arisen and could not be specifically identified. In this case there was no claim that Mr. Dyrud has been excluded from participation in the management of SIRL or that Mr. Dyrud's quasi-partner has otherwise failed to observe equitable obligations owed to him. The learned judge therefore erred when he held that there was a state of functional deadlock in the management and affairs of SIRL.

  Ng Eng Hiam v Ng Kee Wei and others [1964] UKPC 53 applied; Lau v Chu [2020] 1 W.L.R. 4656 applied.

• 5. A well-recognised basis for seeking a winding up on the just and equitable ground is the breakdown of trust and confidence between participating members within a quasi-partnership. The court has power to...