A Level Playing Field: Security for Costs Applications in Winding Up Proceedings
12 Mar 2015
The Court of Appeal has recently clarified that if a foreign company, being a shareholder of a Cayman Islands company, issues a winding up petition against that company and there is evidence that the petitioning company will be unable to pay an adverse costs order if the respondent is successful at trial, then the Cayman Islands court has an inherent jurisdiction to order the petitioning foreign company to provide security for the respondent's costs – Re Dyxnet Holdings 1. Foreign company petitioners are now in the same position as Cayman Islands petitioners.
The Statutory Reforms in 2009
The Court of Appeal began its analysis by considering the effect of the statutory reforms in 2009 to the laws and court rules relating to the winding up of Cayman Islands companies 2. Prior to those reforms, if an (allegedly) impecunious shareholder presented a winding up petition the court had the power to order the petitioning company to pay security for the respondent's costs, either under the former rules of court (if the company was incorporated overseas) or under section 74 of the Companies Law (if the company was incorporated in the Cayman Islands). Section 74 is a general provision which enables the court to order that a Cayman Islands company who is a petitioner in any proceedings (i.e. it is not limited to winding up proceedings) to pay security for the respondent's costs if it is shown that the petitioner will be unable to pay the respondent's costs if the respondent is successful at trial. In 2009 the relevant former rules were replaced. The new rules do not contain any power for the court to make an order for security for costs against an (allegedly) impecunious foreign petitioner. However, section 74 of the Companies Law was not changed so the court retained the power to make an order for security for costs against an (allegedly) impecunious petitioner incorporated in the Cayman Islands.
Jurisdiction in the Companies Winding Up Rules a complete code?
The Court of Appeal then considered whether, despite the absence of an express power in the court's rules, the court retained an inherent jurisdiction to make an order for security for costs on a shareholder's winding up petition where the petitioning shareholder is an (allegedly) impecunious foreign company.
It reviewed the earlier case of Re Freerider Ltd 3. In that case an individual shareholder of a Cayman Islands company had issued a winding up petition against that company. It was alleged by the respondent that the petitioner would be unable to pay an adverse costs order at trial, and therefore he should provide security for the respondent's costs. Foster J concluded that the absence of an express power in the rules to order such an individual petitioner to pay security for the respondent's costs was a deliberate departure from the former powers of the court and that the absence of such an express rule excluded any inherent power to make such an order.
In Dyxnet, at first instance, on the question of jurisdiction Cresswell J held that Foster J's reasoning in Freerider was equally applicable to the situation where the petitioning shareholder was a foreign company. On the basis that the power under section 74 of the Companies Law only applies to Cayman Islands companies and in the absence of an express power in the Companies Winding Up Rules in respect of foreign companies, Cresswell J held he did not have jurisdiction to order the (allegedly impecunious) petitioning foreign company to pay an order for security for the respondent's costs. Cresswell J declined to consider what, if any, amount of security he would have ordered the petitioner to pay had the court had jurisdiction to make the order. Cresswell J granted leave to appeal.
Dyxnet on Appeal
On appeal, the Court of Appeal held that Foster J had been wrong to conclude in Freerider that the court had no inherent jurisdiction to order security for costs against an (allegedly) impecunious petitioner seeking to wind up a Cayman Islands company and reversed Cresswell J's order on jurisdiction and remitted the question of the exercise of discretion back to the Grand Court.
The Court of Appeal held that:
(a) Section 74 of the Companies Law provides a statutory power to make an order for security for costs against a company incorporated in the Cayman Islands in respect of proceedings to wind up Cayman Islands companies.
(b) Applying the principles set out in the Privy Council's reasoning in GFN SA v Bancredit Cayman Ltd 4, section 74 does not extend the court's inherent power to make an order for security for costs but curtails the rule of practice that the court will not make such an order against a petitioner who might thereby be precluded from pursuing his claim. That rule of practice is similarly curtailed, in relation to foreign companies, by Article 16 of the Bill of Rights (part of the Constitution of the Cayman Islands).
(c) Article 16 of the Bill of Rights requires that the court not unjustifiably discriminate on any grounds such as national origin or other status (and cited with approval two previous decisions of the Grand Court in that regard on applications for security for costs 5).
(d) It would be wrong in principle for the court to refuse to exercise its statutory power under section 74 of the Companies Law (in respect of impecunious Cayman Islands companies). Therefore the only means of avoiding the discriminatory treatment between Cayman Islands and foreign companies with respect to applications for security for costs is if the court retains an inherent jurisdiction to award security for costs against impecunious foreign companies.
This decision reinforces the Cayman Islands court as a level playing field as between local and foreign corporate petitioners on applications for the payment of security for costs in winding up proceedings.
1 Dyxnet Holdings Ltd v Current Ventures II Ltd & another (Unrep., 20 February 2015).
2 Mainly in what now comprises Part V of the Companies Law and the Companies Winding Up Rules.
3 Re Freerider Ltd 2010 (1) CILR 286.
4  UKPC 39;  CILR] 578 (itself an appeal from the Court of Appeal of the Cayman Islands).
5 Gong v CDH China Management Company Ltd  1 CILR 57 and Elliott v CIHSA  CILR 163.
T: +353 1 619 2031
Associate Hong Kong
T: +852 3690 7526
T: +65 6922 8416
Partner Hong Kong
T: +852 3690 7449
Associate Hong Kong
T: +852 3690 7587
Associate Hong Kong
T: +852 3690 7490
T: +44 20 7466 1635
Associate Cayman Islands
T: +1 345 814 5401