Cesar Hotelco v Ryan

• Jurisdiction: Cayman Islands
• Judge: (Cresswell, J.)
• Judgment Date: 25 September 2012
• Court: Grand Court (Cayman Islands)
• Date: 25 September 2012

Grand Court, Financial Services Division

(Cresswell, J.)

CESAR HOTELCO (CAYMAN) LIMITED and FOUR OTHERS

and

RYAN and FIVE OTHERS

H. Robinson for the plaintiffs;

I. Huskisson for the defendants.

Cases cited:

(1) Banco Economico S.A. v. Allied Leasing & Fin. Corp., 1998 CILR 102, referred to.

(2) Bodden (J.M.) & Son Intl. Ltd. v. Dettling, 1990–91 CILR 220, dicta of Malone, C.J. considered.

(3) Bristol Fund Ltd., In re, 2008 CILR 317, referred to.

(4) Dolphin Quays Devs. Ltd. v. MillsWLRUNKUNKUNK, [2008] 1 W.L.R. 1829; [2008] 4 All E.R. 58; [2008] Bus. L.R. 1520; [2008] C.P. Rep. 29; [2008] 2 BCLC 774; [2008] EWCA Civ 385; sub nom. Mills v. Birchall, [2008] BCC 471; [2008] 4 Costs L.R. 599, applied.

(5) Eagle Ltd. v. Falcon Ltd., [2012] EWHC 2261 (TCC), applied.

(6) Globalink Telecomms. Ltd. v. Wilmbury Ltd., [2003] 1 BCLC 145; [2002] BCC 958; [2002] EWHC 1988 (QB), considered.

(7) Grand Cay Devs. Ltd. v. Griesel, 2004–05 CILR N [18]; on appeal, 2004–05 CILR N[51], considered.

(8) Renova Resources Private Equity Ltd. v. Gilbertson, 2009 CILR 268, referred to.

(9) Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd., [1973] Q.B. 609; [1973] 2 W.L.R. 632, applied.

Legislation construed:

Companies Law (2011 Revision), s.74: The relevant terms of this section are set out at para. 19.

Civil Procedure-costs-security for costs-court to first consider whether, if defendant successful, plaintiff”s assets would be insufficient to pay costs-if so, discretion to order security-to consider all circumstances, in particular, whether (i) bona fide claim; (ii) reasonably good prospect of success; (iii) admission by defendant that money due; (iv) substantial payment into court/‘open offer’ of substantial amount; (v) application being used oppressively; (vi) plaintiff”s want of means caused by defendant”s conduct; and (vii) application made at late stage

Civil Procedure-costs-security for costs-in ordinary case of receiver suing unconnected defendant on behalf of insolvent company, security appropriate-in special circumstances that plaintiffs and defendants closely-connected companies from same group and first defendant former director of plaintiffs, security inappropriate-plaintiffs” want of means brought about by defendants” conduct so unjust to give preference over plaintiffs other unsecured creditors

The plaintiffs brought claims against the defendants for, inter alia, breach of fiduciary duty and the defendants counterclaimed for, inter alia, breach of contract.

The plaintiffs were property owners to which the defendants provided services in connection with developing a luxury resort. All the plaintiff and defendant companies were part of the same group and were ultimately over 90% owned by the first defendant, R. A loan of US$250m. had been made by Column Financial Inc. to the first to fourth plaintiffs (‘the receivership companies’), secured by, inter alia, a debenture granting a fixed and floating charge over the first plaintiff”s assets and undertaking and a collateral debenture over the second to fourth plaintiffs” assets and undertakings, both securities being later assigned to RC Cayman Holdings LLC (‘the lender’). R was a director of each of the receivership companies until, when the plaintiffs” total deficit reached US$340,640,000, the lender took steps to enforce its security and the receivers were appointed.

The plaintiffs brought various claims against the defendants, who, in the present proceedings, sought (i) security for their costs; and (ii) an advance

payment towards R”s costs, pursuant to a claimed director”s indemnity under the articles of the first to third plaintiffs.

The defendants submitted, inter alia, that (i) if they were successful in their defences, the plaintiffs would be unable to pay their costs; (ii) their defences had a high degree of potential success; (iii) in any event, their counterclaims would extinguish the plaintiffs” claim altogether; (iv) security for costs should usually be awarded against a company in receivership; (v) accordingly, the court should exercise its discretion under the Companies Law (2011 Revision), s.74 to award the defendants security for their costs; and (vi) alternatively, the plaintiffs should indemnify R in respect of any legal fees incurred defending proceedings.

The plaintiffs submitted, inter alia, that (i) their ability to meet a future costs order was not yet known; (ii) in any event, in all the circumstances of the case, security for the defendants” costs should be refused-in particular, the defendants had failed to adduce a proper account of their management of the plaintiffs” affairs from which the court could assess the plaintiffs” financial position and whether it would be just to grant the application; (iii) R, as a director, was not a party to the contracts contained in the plaintiffs” articles and could not, without more, claim the benefit of any indemnity clause contained therein; and (iv) further, the first plaintiff”s articles expressly subordinated the indemnity to the debt owed to the lender.

Held, dismissing the applications:

(1) The court would not order that the defendants be given security for their costs. On such an application, the court would first consider whether, if the defendants were successful, the plaintiffs” assets would be insufficient to pay their costs-calculated on a balance-sheet basis. If the court were so satisfied, it had a discretion whether to order security for costs in all the circumstances of the case-in particular (i) whether the plaintiffs” claim was bona fide and not a sham; (ii) whether he had a reasonably good prospect of success; (iii) whether there was an admission by the defendants in their defence or elsewhere that money was due; (iv) whether there was a substantial payment into court or an ‘open offer’ of a substantial amount; (v) whether the application for security was being used oppressively, e.g. so as to stifle a genuine claim; (vi) whether the plaintiffs” want of means had been brought about by any conduct by the defendants, such as delay in payment or in doing their part of the work; and (vii) whether the application was made at a late stage of the proceedings (paras. 45–48; para. 78).

(2) In all the circumstances of this case, an order for security for costs was inappropriate. Although the court would assume that the plaintiffs” assets would be insufficient to pay the defendants” costs, it would not exercise its discretion to order security. In the ordinary case of a company, acting by a receiver, suing an unconnected defendant with whom the company had contracted, the defendant could normally obtain security for costs. In the present case, however, R and the defendant companies were

not independent parties who had dealt with the plaintiffs at arm”s length, but were closely-connected parties forming part of the same group. Further, R had been responsible as director for the receivership companies and his conduct of their affairs was such that immediately prior to the receivership, their deficit was US$340,640,000. Since the plaintiffs” want of means had been brought about by the defendants” conduct, it would have been unjust to order that they be given security for their costs, in preference to the plaintiffs” other unsecured creditors (paras. 64–73).

(3) The court would not grant an advance indemnity payment as the application of the indemnity clauses in the plaintiffs” articles was subject to real dispute. First, the mere existence in the articles of an indemnity clause did not mean that it was incorporated into the companies” employment contract with R; and, as his contract had not been adduced, the court was unable to identify its terms. Secondly, the plaintiffs” articles differed in material respects-in particular, the first plaintiff”s articles provided that any indemnity would be fully subordinated to the debt (para. 74; paras. 77–78).

1 CRESSWELL, J.: This ruling relates to applications by the defendants for security for costs, alternatively an indemnity.

Introduction

2 The claim relates to the Ritz-Carlton Grand Cayman Resort (‘the resort’). The plaintiffs were property owners and the defendants provided a full range of services with a view to developing and then operating a world-class luxury resort. All of the plaintiff and defendant companies are ultimately over 90% owned by Michael Ryan (‘Mr. Ryan’). Accordingly, their accounts were managed on a consolidated basis. Until 2010, the accounts were audited on an annual basis by Ernst & Young.

3 As to the resort, the hotel is owned by Cesar Properties Ltd. (‘Cesar Properties’). The unsold condominiums are owned by Condoco Properties Ltd. (‘Condoco Properties’), Cesar Properties, Cesar Hotelco (Cayman) Ltd. (‘Hotelco’) and Condoco Grand Cayman Resort Ltd. (‘CGCR’). Cesar Properties also owns the 14 unsold lots on which deckhouses are intended to be constructed. The golf course, the condominiums and deckhouses are part of a total of 7 strata plans within the resort, registered under the Strata Titles Registration Law (2005 Revision).

4 The hotel, golf course and 24 of the condominiums are currently managed and operated by the Ritz-Carlton Hotel Co. of the Cayman Islands Ltd., through various service agreements with one or more of the first to fourth plaintiffs (‘the receivership companies’) and, variously, the strata corporations in which the different properties fall. The present proceedings do not directly concern those properties being managed and operated by the Ritz-Carlton Hotel Co. of the Cayman Islands Ltd.

5 The resort was developed by Mr. Ryan through companies controlled by him and directly or indirectly owned by the fourth defendant, I.R.R. Ltd. (‘I.R.R.’), which, subject to security granted over the receivership companies, was the ultimate holding company of the group. I.R.R. is owned by entities controlled by Mr. Ryan and by The King”s Foundation-Investment...