In a novel judgment of Mr Justice McMillan delivered on 1 August 2017, the Grand Court of the Cayman Islands awarded costs against non-parties that did not fund or control the proceedings in issue. The Court also clarified that the costs rule for sanction applications (CWR O.24 r.9) is applicable to an application by a liquidator under sections 103 and/or 138 of the Companies Law.
The judgment, which considers the scope of the non-party costs jurisdiction in the context of a liquidation proceeding, may have unintended implications for creditor participation in liquidation proceedings.
Within the context of the long-running inter partes litigation between Primeo Fund (in Official Liquidation) (“Primeo”) and the Bank of Bermuda (Cayman) Ltd et al (the “HSBC Defendants”), the HSBC Defendants urged the joint official liquidators of Primeo (the “JOLs”) to exercise their statutory powers under sections 103 and/or 138 of the Companies Law to obtain certain documents relevant to the matters in dispute from Primeo’s auditors, Ernst & Young Cayman Ltd (“EY Cayman”).
In December 2015, Mr Justice Jones QC made an order in the litigation requiring the JOLs to “request” that EY Cayman conduct searches for certain categories of documents belonging to Primeo, or to which Primeo was otherwise entitled, but which had not been discovered by the JOLs in the litigation. These included certain documents relating to Ernst & Young Luxembourg SA (“EY Lux”), which had carried out the relevant audit ‘fieldwork’ in respect of Primeo on behalf of EY Cayman.
Within the Primeo liquidation proceedings, the JOLs subsequently made an application under sections 103 and/or 138 against EY Cayman (“EY Cayman Summons”) seeking that EY Cayman use its “best endeavours” to obtain certain categories of documents from EY Lux. The JOLs had not been compelled by court order to make the application, although the judge had provided some encouragement to that course being taken.
The EY Cayman Summons was heard by a different judge, Mr Justice McMillan, albeit still within the liquidation proceedings. The HSBC Defendants sought but were refused permission to appear on the EY Cayman Summons as interested parties (“Leave to Appear Summons”). The JOLs did not allow the HSBC Defendants to have any input in the formulation of the EY Cayman Summons, the evidence or the legal argument.
The judge dismissed the EY Cayman Summons, with written reasons in a judgment of 21 November 2016, with the question of costs held over.
Only the JOLs’ costs and EY Cayman’s costs of the EY Cayman Summons were in issue, the HSBC Defendants having previously agreed to pay the costs of the JOLs and EY Cayman in relation to the unsuccessful Leave to Appear Summons.
JOLs’ non-party costs application
The JOLs sought to recover their costs of the EY Cayman Summons from the HSBC Defendants, under the non-party costs jurisdiction, and on the standard basis. As part of that application, the JOLs also sought to displace any liability that Primeo might have for EY Cayman’s costs of the EY Cayman Summons onto the HSBC Defendants, as part of the JOLs’ “costs”.
The key issue was whether the Court should order costs against the HSBC Defendants as a non-party under section 24 of the Judicature Law.
EY Cayman’s costs application
EY Cayman applied for its costs of the EY Cayman Summons to be paid out of Primeo’s assets on the indemnity basis, under CWR O.24 r.9(4)(a). That rule relates to “costs of sanction applications” and relates to the costs of official liquidators, the liquidation committee, creditors and contributories. The key issue was whether the rule applied at all and, if so, on what basis EY Cayman should get its costs.
EY Cayman did not apply for its costs to be paid by the HSBC Defendants.
Decision: JOLs’ non-party costs application
The HSBC Defendants argued that this was not an appropriate case to order costs against a non-party. The usual situation would involve an application for costs against a litigation funder or a director of an insolvent company, in circumstances where there had been unsuccessful litigation brought by an impecunious party unable to meet the costs of the successful defendant.
In Dymocks  1 WLR 2807, the Privy Council held that “Where… the party not merely funds the proceedings but also substantially controls… them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs”
The JOLs’ costs were the costs of the unsuccessful party, not the successful party. The non-party costs jurisdiction had not been used before to allow an unsuccessful applicant to recover its costs from a non-party. That was contrary to the general principle of costs following the event. Moreover, any costs order against the JOLs in favour of EY Cayman could not be “costs” of the JOLs. An order for costs is an indemnity for a party’s liability to its own attorney together with expenses incurred. That is the indemnity principle which governs costs. An order for costs did not extend to indemnifying that party from its liability to satisfy an adverse costs award to another party.
Even if the non-party jurisdiction could be considered, the HSBC Defendants argued that they were not the “real party” to the application within the meaning of the case law. The HSBC Defendants did not fund or stand to gain any financial benefit from the substantive application. Nor did they control the JOLs’ application by having some management of it: the JOLs had effectively shut out the HSBC Defendants from formulating and participating in the application; they were not the “mere creatures” of the HSBC Defendants. Moreover, the judge had not made any finding of impropriety or bad faith on the part of the HSBC Defendants.
By contrast, the JOLs relied heavily on a decision of the Cayman Islands Court of Appeal in relation to another application made by them under their statutory powers to obtain documents from Primeo’s promoter and some of Primeo’s former directors in Austria (the “Pioneer Application and Appeal”). On that occasion, the JOLs applied for and obtained an order for a letter of request to issue, after being compelled to do so by an order of Mr Justice Jones QC made on an application by the HSBC Defendants. The order for a letter of request to issue was successfully appealed by an interested party and the HSBC Defendants were ordered to pay their costs.
The HSBC Defendants argued that the Pioneer Application and Appeal was not analogous. On that occasion, the JOLs were compelled by court order to make the application for a letter of request; the HSBC Defendants appeared and made submissions on the application at first instance and on appeal; and the Court of Appeal ordered that the HSBC Defendants pay the costs of the JOLs and the successful appellant not under the non-party costs jurisdiction, but as parties who had appeared and made submissions. The Court of Appeal did not consider the exceptional non-party costs jurisdiction at all.
However, Mr Justice McMillan appears to have been persuaded by the JOLs’ reliance on the outcome of the Pioneer Application and Appeal, and ordered that the HSBC Defendants pay (on the standard basis) the JOLs’ costs, which were to include the JOLs’ costs liability to EY Cayman.
Decision: EY Cayman’s costs application
In relation to EY Cayman’s application for costs, a question arose whether the costs of the EY Cayman Summons fell within CWR O.24 r.9 (“Costs of sanction applications”). That in turn depended on whether (i) an application under sections 103 and/or 138 of the Companies Law was a sanction application for the purpose of the CWR, even though it is not a power that is set out under Part I of the Third Schedule of the Companies Law as a power exercisable with sanction; and (ii) EY Cayman was a creditor for the purpose of CWR O.24 r.9.
In relation to the meaning of a sanction application, CWR O.11 r.1 provided that it included any application to the Court by an official liquidator “for an order sanctioning his exercise or proposed exercise of any power conferred upon him by Part I of the Third Schedule of the [Companies] Law or otherwise”. Although the statutory powers under sections 103 and/or 138 of the Companies Law were not within Part I of the Third Schedule of the Companies Law, the words “or otherwise” in O.11 r.1 broadened the scope of what applications would constitute sanction applications for the purpose of the CWR.
As to the separate issue of whether EY Cayman was a “creditor” for the purpose of CWR O.24 r.9, the judge held that EY Cayman was not a creditor or did not oppose the substantive application in its capacity as creditor. EY Cayman was merely the respondent to the application under section 103 and/or 138 of the Companies Law, resisting an order to obtain and provide documents.
Nevertheless, the judge found that EY Cayman could still avail itself of CWR O.24 r.9(5), which provides that “The Court shall make orders for costs in accordance with these general rules unless it is satisfied that there are exceptional circumstances and special reasons which justify making some other order or no order for costs”.
EY Cayman was found to be entitled to its costs from the JOLs on the indemnity basis, albeit that such costs would form part of the JOLs’ costs for the purposes of the costs order against the HSBC Defendants.
In relation to EY Cayman’s costs application, the judgment clarifies that CWR O.24 r.9 (“Costs of sanction applications”) may apply to applications by liquidators for permission to exercise statutory powers under Part V, even if they are not powers specifically set out under Part I of Schedule 3 (“Powers exercisable with sanction”).
However, in relation to the JOLs’ non-party costs application, the judgment is novel and, in our respectful opinion not entirely welcome, in the following three respects.
First, this appears to be the first time that the non-party costs jurisdiction in the Cayman Islands or in England has ever been used by a losing party to recover its costs from a non-party. That subverts the principle that costs follow the event. The non-party costs jurisdiction is normally relied on by a winning party who seeks his costs from a non-party only because the losing party is impecunious – the non-party might typically be a litigation funder or the director of an insolvent company or a liquidator.
Second, it may encourage non-party costs applications by liquidators in liquidation proceedings against specific creditors for the benefit of the estate as a whole, which may have a chilling effect on creditor participation in liquidation proceedings. In particular:
- A creditor who appears and opposes a liquidator’s application, and is unsuccessful, will not ordinarily face any adverse costs, in the absence of impropriety, misleading the court or adopting a wholly unreasonable position: CWR O.24 r.9(4)(b).
- By contrast, a creditor who does no more than encourage a liquidator to make an application under the liquidator’s statutory powers may now be vulnerable to meet the liquidator’s costs of such application if made and unsuccessful, notwithstanding the fact that (i) the liquidator makes the application without compulsion, (ii) the creditor does not exercise any control over the application and (iii) the creditor does not appear on the application.
Third, a person’s liability to pay another person’s costs has been held to fall within the scope of the first person’s “costs”. This appears to infringe the indemnity principle which governs costs principles – i.e. that one party may only be ordered to reimburse another party in relation to costs insofar as the party being reimbursed has a liability to pay his attorney for such sums.
We therefore expect that the issues addressed in this judgment are likely to be considered further in due course.