Article by Jeremy Walton and Jeremy Snead From Appleby

If a creditor successfully petitions for the winding up of a defaulting debtor in the Cayman Islands, it has the benefit of a priority recovery of those costs over the unsecured debts of the company and even the liquidators’ own remuneration and expenses. The Cayman Islands Court of Appeal (CICA) has now, for the first time, considered and set out the principles that should be applied in the event a petition is withdrawn, where the opposing company is left with thrown away costs1. The judgment also provides a reminder of the importance of complying with procedural deadlines for key evidence and what may be taken into account in the ruling of the judge at first instance.

Summary

The CICA held that save under exceptional circumstances (which were absent in this case) a party which claims a debt that may be disputed bears the costs risk of pursuing such debt by way of statutory demand and winding up petition without first ensuring that any disputes are resolved. In this case, evidence that the petitioner had not known of the dispute before petitioning had been served out of time and only came to the judge’s mind by a procedural irregularity; it should not have influenced his ruling that the Petitioner did not have to pay the Debtor’s costs in defending the Petition.

Background to the Case

KBC Investments V Limited (the Petitioner) was the assignee of a redemption debt of $1,068,530.31 (the Debt) owed by Aramid Entertainment Fund Limited (the Debtor), a company incorporated in the Cayman Islands carrying on business as a mutual fund. The Debtor had withheld paying the Debt because of proceedings it had initiated in New York (the New York Proceedings). However, the New York Proceedings failed at first instance and on appeal and so the Petitioner issued a statutory demand for the Debt.

The Debtor sought to argue that a further appeal and motion for re-argument was pending in the New York Proceedings but the Petitioner contended that the proceedings were finally resolved and issued a winding up petition on 10 July 2013 (the Petition) prior to the resolution of these issues. On the same day, but following service of the Petition, the Debtor commenced further proceedings in the State Court of New York against the Petitioner and others, seeking an amount in excess of the Debt (the Further Proceedings).

The Debtor opposed the Petition on the basis of the Further Proceedings as a result of which, on 1 August 2013, the Petitioner sought leave to withdraw the Petition. Mr Justice Foster gave leave but reserved argument on the costs thrown away on the petition until 15 August 2013 and set a strict timetable for the evidence to be adduced in the costs hearing. In filing its reply evidence, the Debtor referred to a conversation with an affiliate of the Petitioner, which demonstrated that the Petitioner should have known about the Further Proceedings. The Petitioner sought to rebut this evidence by serving an additional affidavit the day before the hearing (the Melsens Affidavit). Upon the Debtor’s objection to the late service of this evidence, Mr Justice Foster directed that the timetable had been clear, the evidence was out of time, and could not be referred to at the hearing.

However, the Melsens Affidavit ended up in the Petitioner’s hearing bundle, although it was accepted at the hearing that the Melsens Affidavit had been ruled inadmissible in the proceedings.

In a draft ruling circulated by the judge on 11 October 2013, he made reference to the Melsens Affidavit as rebutting the evidence that the Petitioner knew of the Further Proceedings such that the case for the Petitioner being aware of the Further Proceedings prior to the Petition was “unconvincing and not established.” The Debtor drew the judge’s attention to the direction on the Melsens Affidavit and invited him to reconsider the ruling. The judge indicated that, having found the Melsens Affidavit in the hearing bundle, he had considered it to be relevant and of assistance but that having regard to all other circumstances he would have reached the same decision whether or not he had placed any reliance on the Melsens Affidavit. He accordingly ruled that the Petitioner did not have to pay the Debtor’s costs in defending the Petition.

The Company appealed to the CICA

The Appeal Judgment

Sir John Chadwick, President of the CICA, ruled that:

The Melsens Affidavit should not have been in the hearing bundle and, if it had been included, should have been removed following the judge’s direction;

The judge was correct to recognize that he had been wrong to rely on the Melsens Affidavit, but he should then have considered whether it was proper that he could deliver judgment at all in light of whether he could put the Melsens Affidavit from his mind;

The Judgment was flawed because the exercise of his discretion as to costs was based (in part, at least) on findings of fact which he had made after taking account of material which was not in evidence before him; as a result, the appeal should be allowed and the Judgment was overturned.

Chadwick P then went on to consider how a Court in the Cayman Islands should address the issue of costs which have been wasted by the presentation of a winding up petition which is not pursued, and approved the following principles:

The general approach in England and Wales was that the failed petitioner should pay the respondent company’s costs of a withdrawn petition2;

This reflected the fact that pursuing a winding up petition without having obtained judgment is a high risk strategy and if it turns out that there is a defence to the claim, the petitioner should pay the costs3;

In exceptional circumstances this rule could be set aside,4 so discretion would have to be exercised on a case by case basis, but the “ordinary course” is for the petitioner to pay the costs of the unsuccessful petition5; and

That in the case of a disputed debt, the reasonableness, or otherwise, of the petitioner’s conduct is not a matter for enquiry, the petitioner presents his petition at his own risk6.

Chadwick P commented that the present case provided a striking illustration of the consequence of departing from the 4th principle. In conducting a two day hearing to decide whether the Petitioner had acted reasonably in pursuing the Petition, costs of $250,000 to $300,000 had been incurred in relation to a costs liability of $20,000 to $30,000. Chadwick P noted that this had caused substantial affidavit evidence to be prepared and filed, resulting in a ruling extending to 56 paragraphs over 28 pages, which decided disputed questions of fact on the basis of untested affidavit evidence.

Chadwick P confirmed that the principles he had enunciated best served the interests of justice and concluded that there was nothing in the facts of the case which justified a departure from the general rule. The Petition was founded upon a debt which was known to be disputed, which was then withdrawn by the Petitioner, appreciating that to pursue it would be hopeless. The appeal would therefore be allowed and the Petitioner would bear the costs thrown away.

Commentary

The judgment of the CICA is consistent with the “loser pays” principle that underlies litigation in the Cayman Islands and buttresses the general understanding that a statutory demand and subsequent winding up petition is not a short cut to resolving disputes over debts. In endorsing the principles set out in the English authorities, the CICA has confirmed that a petitioner pursues a disputed debt without a judgment entirely at its own risk.

The CICA’s comments about the judge’s consideration of crucial evidence served outside of the procedural timetable provides a stern reminder to practitioners of the importance of complying with procedural deadlines; had the judge been able to consider this evidence then the Petitioner might not now be facing a much more significant costs liability than just its own wasted costs.

Footnotes

1 In the matter of Aramid Entertainment Fund Limited CICA 23/2013, 5 May 2014, (unreported)

2 Re Fernforest Ltd [1990] BCLC 693

3 Re Cannon Screen Entertainment Ltd [1989] BCLC 660

4 In re Sykes & Sons Ltd, Teamforce Labour Ltd v Sykes & Sons Ltd [2012] EWHC 1005 (Ch); {2013] Bus LR 106

5 GlaxoSmithKline Export Ltd v UK (AID) Ltd [2003] EWHC 1383 (Ch); [2004] BPIR 588

6 Re Fernforest Ltd [1990] BCLC 693

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