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Court of Appeal Orders Security for Costs in Winding Up Proceedings

February 2015 Nigel K. Meeson QC

Re Dyxnet Holdings Ltd (Reasons Handed Down 23 February 2015)

Section 74 of the Companies Law (“Section 74”) provides that security for costs may be ordered to be provided by a plaintiff Cayman Islands company where the Court is satisfied that the assets of the plaintiff company will be insufficient to pay the defendant’s costs.

This statutory provision only applies to Cayman Islands companies. The Grand Court Rules (“GCR”) Order 23 provides for security for costs to be provided by a foreign plaintiff. This Rule does not apply to Winding Up proceedings. Winding Up proceedings are governed by the Companies Winding Up Rules, 2008 (as amended) (“CWR”) which make no provision for security for costs. It was against this background that the Court of Appeal had to consider whether it had inherent jurisdiction to order a foreign company to provide security for costs in Winding Up proceedings.

In Re Freerider Ltd 2010 (1) CILR 286 (“Freerider”) Foster J had held that there was no jurisdiction to make an order for security for costs against a non-resident individual in Winding Up proceedings because any inherent jurisdiction to do so would be inconsistent with the CWR. In Re Dyxnet Holdings Ltd. Cresswell J followed that reasoning and applied it to a foreign company. The Court of Appeal has said that he was wrong to do so.

In relation to the existence of an inherent jurisdiction to order security for costs the Court of Appeal relied upon the observations of Lord Scott in the Privy Council appeal in the Cayman Islands case of Bancredit 2009 CILR 578 at 582-583:

“It seems to their Lordships clear from the case law dealing with security for costs issues that the court has an inherent jurisdiction to make security for costs orders but that the exercise of that jurisdiction is subject to what has become the settled practice of the court.… The Rules of Court did not create or confer the power to do so but, rather, harnessed the power so as to control its exercise.”

Lord Scott went on to say at 585:

“The effect, therefore, of statutory provisions such as Section 74, or of Rules of Court such as Order 23 Rule 1, is not to confer a jurisdiction that the courts did not previously have, but, in the case of Section 74 and its statutory predecessors, to exclude impecunious corporate plaintiffs from the established settled practice that security for costs orders could not be based on mere impecuniosity, and, in the case of Order 23 Rule 1, to specify particular circumstances in which the jurisdiction could properly be exercised. . . .”

The Court of Appeal emphasised that although there was nothing in the CWR that empowers the court to order security for costs, neither was there anything in the CWR which would be inconsistent with the exercise of an inherent power to order security for costs against a non-resident limited liability company in proceedings under the CWR. It was effectively silent.

The Court held that Section 74 applies only to Cayman Islands companies, it would therefore be discriminatory and contrary to Section 16 in Part I (“Bill of Rights Freedom and Responsibilities”) of the Cayman Islands Constitution1, if the Court were to refuse to order security for costs against a foreign company. The Court rejected the argument that it was actually Section 74 that was discriminatory and unconstitutional and should entitle a Cayman Islands company to argue that it should not be applied because it did not also apply to foreign companies. In this regard the Court said that it would be wrong in principle to refuse to exercise the statutory power under Section 74 unless there were no other means of avoiding discriminatory treatment. There was another means of avoiding discrimination by reliance on the inherent power to order security for costs and apply that against a foreign company in the same manner as Section 74 would apply to a Cayman Islands company.

The Court of Appeal also rejected the argument that the repeated failure of either the Grand Court Rules Committee or the Insolvency Rules Committee to deal with security for costs after the decision Freerider in the various amendments which were made to both the GCR and the CWR, demonstrated an intention to endorse Freerider. The Court would not speculate as to the intention of either Committee in the absence of evidence, nor was it appropriate to speculate that the Insolvency Rules Committee had appreciated the discriminatory effect of the wider ground of Foster J’s decision in Freerider. The actual decision in that case (which concerned an individual and not a company) could be supported on a narrower ground that Section 74 was irrelevant, GCR Order 23 did not apply and the CWR contained no power to award security for costs.

The current position is that where an individual is the petitioner in Winding Up proceedings there is no power to award security for costs, the Court of Appeal approving the narrower basis for the decision in Freerider. Where the petitioner is a company, then there is power if the court is satisfied that there is reason to believe that the assets of the plaintiff company will be insufficient to meet the costs of the company against whom the petition is brought, either under Section 74 if the petitioner is a Cayman Islands company or under the inherent jurisdiction if it is a foreign company.

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

 



1 Section 16 requires the government not to treat any person in a discriminatory manner in respect of their rights under that Part, which includes the right to a fair trial in section 7 of that Part.

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