Re Cybervest Fund

JurisdictionCayman Islands
Judge(Smellie, C.J.)
Judgment Date04 January 2006
CourtGrand Court (Cayman Islands)
Date04 January 2006
Grand Court

(Smellie, C.J.)

IN THE MATTER OF THE CYBERVEST FUND

M.W. Imrie and J.P. Lagan for the petitioner;

K.J. Farrow for the second respondent.

Cases cited:

(1) Aeronave SpA. v. Westland Charters Ltd., [1971] 1 W.L.R. 1445; [1971] 3 All E.R. 1074, applied.

(2) Alipour v. Ary, [1997] 1 W.L.R. 534, followed.

(3) Apollinaris Co.”s Trade Mark, In re, [1891] 1 Ch. 1, followed.

(4) Banco Economico S.A. v. Allied Leasing & Fin. Corp., 1998 CILR 102, followed.

(5) Burton & Deakin Ltd., In re, [1977] 1 W.L.R. 390; [1977] 1 All E.R. 631, followed.

(6) Company, In re a (007130 of 1998), [2000] 1 BCLC 582, followed.

(7) Fortuna Dev. Corp., In re, 2004–05 CILR 533, applied.

(8) JN2 Ltd., In re, [1977] 1 W.L.R. 183; [1977] 3 All E.R. 1104, followed.

(9) Porzelack KG v. Porzelack (UK) Ltd., [1987] 1 W.L.R. 420; [1987] 1 All E.R. 1074, followed.

(10) Pretoria Pietersburg Ry. Co. (No. 2), In re, [1904] 2 Ch. 359, applied.

Legislation continued:

Grand Court Rules, O.23, r.1(1): The relevant terms of this sub-rule are set out at para. 22.

Companies Law (2004 Revision), s.156: The relevant terms of this section are set out at para. 28.

Civil Procedure-costs-security for costs-likely outcome of suit important consideration for ordering security if other side very likely to succeed-discretion normally to be exercised based on likelihood of unsuccessful plaintiff failing to meet award of costs against it from assets within jurisdiction-foreign state agency with good reputation and undoubted resources with valuable shares in Cayman company, unlikely to fail to pay

Companies-compulsory winding up-costs-security for costs-no bar to ordering security by petitioner in winding up-petitioner”s valuable shares in company being wound up, together with good reputation and other undoubted resources as foreign state agency, may make security unnecessary

Companies-dispositions and transfers during winding up-validation by court-no validation order for payment of fund management fees even when company solvent if alleged irregularities in management and company to be wound up within year

The petitioner sought the winding up of the Cybervest Fund.

The petitioner, an agency of the state of Kuwait, was a shareholder in the company and was supported in its petition by two other major investors, altogether controlling 70% of the participating shares in the company. The winding up was requested on the ‘just and equitable’ ground because there had been various convoluted dealings with the assets of the company, about which the respondent (the manager of the fund) had failed to consult the shareholders. These dealings were alleged to be a deliberate attempt by the managers to divert the company”s assets for their own purposes and, by treating transferred capital as invested,

claim management fees at a higher rate. Furthermore, the plaintiff argued that the substratum of the company had failed, it was now acting in breach of agreed investment strategy, and was no longer capable of making the investments for which it was set up.

The respondent (a) opposed the petition on the basis that the funds had been fully invested and it would be harmful to the returns due to the plaintiff and the other investors if the company were prematurely forced into liquidation; (b) sought security for costs, as it had incurred significant expense in preparing the case and, as the petitioner was based outside the Cayman Islands and had no liquid assets within the jurisdiction, was concerned that should it succeed, it would be unable to enforce an order for costs in its favour; and (c) sought a validation order under the Companies Law (2004 Revision), s.156 to enable it to make valid payments to third parties and pay management fees incurred in the ordinary course of business in order to keep the company running whilst the petition was being heard.

The respondent submitted that (a) it had a good chance of success and therefore it was important that security for costs was provided as it was reasonably likely that it would be awarded costs; (b) the plaintiff was ordinarily resident outside the Cayman Islands and on a reasonable construction of O.23, r.1(1)(a) of the Grand Court Rules foreign plaintiffs should usually be required to provide security for costs; (c) if the court would not automatically order security against a foreign petitioner, then it should do so in this case because the petitioner had no liquid funds within the jurisdiction and to enforce the order the respondent would therefore need to travel to Kuwait where, since the petitioner was a state agency, it might be met with a plea of state immunity; (d) if forced to resort to the plaintiff”s shares in the company to meet its costs, it would have to liquidise assets of the company which only notionally belonged to the plaintiff, to the detriment of other investors; and (e) in order to continue to run the company effectively, for the benefit of all investors, it needed a validation order to enable it to make payments in the ordinary course of business, both to third parties, such as audit or administration fees, and management fees to the respondent as agreed in the company”s memorandum and it ought to be allowed to continue to deal with the assets in the normal manner as the company was still liquid and there was not a risk of bankruptcy.

The petitioner submitted in reply that (a) it was irrelevant who was more likely to win the case unless the chance of one side winning appeared to be so low that the case was frivolous; (b) O.23, r.1(1)(a) of the Grand Court Rules gave the court a discretion to order security for costs if it thought it was necessary, and was not a blanket instruction that security should be ordered against any foreign plaintiff; (c) it was the very fact that it was an internationally well-respected state agency which meant that there was no risk of its failing to comply with an order for costs; (d) whilst it had no liquid assets here, its shares in the company would be worth enough to cover any order of costs which might be made

and any further security for costs would therefore be unnecessary; and (e) it did not oppose the validation order regarding third party payments, but such validation should not apply to management fees as they were not necessary for the basic running of the company and, furthermore, s.156 was not intended just to apply to companies where there was a risk of bankruptcy, but also to liquid companies where there was a risk of transactions being made in bad faith, as here, considering the allegations in the petition...

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    ...entities and Parker J affirmed an established line of authority (Tasarruf Mevduati Sigorta Fonu [2006 CILR 351] and Re Cybervest Fund [2006 CILR 80]) that there is a rebuttable presumption that security for costs should not be ordered against state entities and which arises from "comity and......
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