A Level Playing Field: Security for Costs Applications in Winding Up Proceedings

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 Holdings1. 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 companies2. 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 Ltd3. In that case an individual shareholder of a Cayman Islands company had issued a winding up petition against that company. It was alleged...