In the matter of Dyxnet Holdings Ltd Cause no FSD 8 of 2012 (PCJ)

There is an anomaly in when security for costs will be granted in the Cayman Islands. A defendant can apply for security in the Grand Court and in the Court of Appeal, but a company cannot do so when it defends a Petition to wind it up. Here we look at a challenge to this anomaly, in a case due to go before the Court of Appeal.

What is “security for costs”?

Faced with a nuisance claim by a Plaintiff with no money, some companies prefer to settle with the Plaintiff rather than incur substantial (and irrecoverable) costs defending the claim. Security for costs should stop that happening, by making a Plaintiff pay money into Court on account of the Defendant’s costs before their claim can proceed any further.

Does that stop genuine claims?

The process must not be used oppressively to stifle a genuine claim, but a Defendant can apply to the Court where it thinks the Plaintiff will be ordered to pay some or all of the Defendant’s costs and there is reason to believe that the Plaintiff does not have sufficient assets to pay those costs. If the Court considers it is appropriate to do so, it makes an Order for security for costs. If the Plaintiff does not pay the money into Court, then it cannot proceed, and if it does so, but subsequently defaults on a costs order, the Defendant can apply to the Court for the money held as security.

Security for costs in Winding-up proceedings: Freerider

Back in 2010 a judge ruled that the Cayman Islands Grand Court does not have an inherent jurisdiction to make an order for security for costs in applications under the Companies Winding-up Rules (CWR). In In the matter of Freerider the judge found that without a specific provision in the CWR which gives the court power to order security for costs in winding-up proceedings, then the Grand Court has no inherent jurisdiction to make such an order.

The challenge: Dyxnet

A Cayman company (Dyxnet), faced a winding-up petition on just and equitable grounds based on oppressive and unfair conduct by the management of Dyxnet. The Petitioners were British Virgin Islands incorporated companies, which Dyxnet argued were insolvent or on the verge of insolvency, and whose Petition raised issues which were complex and fact dependent and so would have to go to trial. Dyxnet also argued that the Petitioners existing financial troubles and the cost to them of bringing their claim to trial meant that they would not be able to pay any costs order made against them.

Jurisdiction: the Petitioner’s case

The key arguments on both sides were on whether the Court had power to grant the order. The Petitioners argued that the Court’s inherent jurisdiction should only be exercised if it were consistent with or supplementary to the whole scheme of the CWR. As the Insolvency Rules Committee responsible for the CWR has included costs provisions in the CWR, the fact that they have not included the Grand Court rule giving power to order security for costs should be read as a deliberate omission. They argued that the previous Privy Council precedent which said there was an inherent jurisdiction related to the insolvency regime before the current CWR were introduced in 2009.

Dyxnet’s arguments

Dyxnet disagreed, and argued that the Petitioners’ case raised questions of fact, valuation and interpretation which were only suitable for trial, and as both were foreign companies, in liquidation or on the cusp of it, it was clear that they could not meet an order for costs made against them. Arguments in Freerider about the omission of a power to make an order for security for costs preceded the Privy Council decision which said the Court had inherent power. Furthermore, under s74 of the Companies Law, the Court had inherent jurisdiction to grant full and adequate security in these circumstances.

Dyxnet decision

The judge in Dyxnet took a practical view. The Companies Law applied to Cayman Island incorporated companies only, and so s74 was not relevant here. The decision in Freerider was in 2010, and if it were contrary to the intention of those making the rules, then new rules would have been introduced to address the issue, either in the Grand Court Rules or the CWR. That has not happened. With that in mind, the judge followed Freerider and refused the order for security for costs. But even though he was not convinced the decision in Freerider was wrong, he did give leave to Appeal, which is where the matter is now.

Conclusion

It remains to be seen whether the Court of Appeal will agree that the omission of a specific rule giving the power to award security for costs was intended to remove any inherent jurisdiction of the Court to do so. The previous Privy Council decision held that an inherent jurisdiction exists and it could be said that those drafting the CWRs may have thought that would fill any gaps they left on this issue. There is no easily comprehensible reason why security for costs should not be part of the CWR as there seems no reason why impecunious Petitioners for winding-up whose case may not be clear should essentially litigate risk-free in a way denied to Plaintiffs or Appellants under the Grand Court Rules.

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