The Companies Act (2022 Revision) and Virginia Solution SPC Ltd Between: Valley Health System Petitioner v Augusta Healthcare, Inc. Respondent

• Jurisdiction: Cayman Islands
• Judge: Justice Margaret Ramsay-Hale
• Judgment Date: 23 August 2022
• Court: Grand Court (Cayman Islands)
• Docket Number: FSD NO: 5 of 2020 (MRHJ)

In the Matter of the Companies Act (2022 Revision)

And in the Matter of Virginia Solution SPC Ltd

Between:

Valley Health System

Petitioner

and

Augusta Healthcare, Inc.

Respondent

Before:

The Hon. Justice Margaret Ramsay-Hale

FSD NO: 5 of 2020 (MRHJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Companies Act — Winding Up — Petition heard on an inter partes basis — Successful Petitioner's application for Indemnity costs — Companies Winding Up Rules O. 24, r 8(4) — Principles on which indemnity costs granted

Confidentiality Application — Companies Winding Up Rules O. 24 r 6 — principles governing exercise of the discretion to seal file—whether order in the interest of justice

Appearances:

Mr. Liam Faulkner and Ms Demi Mclean of Campbells LLP for the Petitioner

Mr. Alex Potts QC and Mr. Spencer Vickers (28 April 2022 only) of Conyers Dill & Pearman LLP on behalf of the Respondent

IN CHAMBERS

COSTS JUDGMENT

1 The Petitioner, Valley Health System (“Valley Health”) successfully petitioned for the winding up of Virginia Solution SPC Ltd., a Cayman Islands captive insurance company (the “Company”) on the just and equitable basis due to an irretrievable breakdown in trust and confidence between Valley Health and the Respondent, Augusta Healthcare Inc (“Augusta”), the only other member of the Company. The facts are set out fully in the judgment handed down on 10 February 2022 and will not be rehearsed here.

This Application

2 Valley Health now seeks an order that Augusta:

• (i) Pay to the Company the costs of and incidental to the proceedings incurred by the Company up to the date of the Order dated 10 February 2022 on a full indemnity basis in the amount of US$777,000 and such other professional fees incurred by the Company prior to the date of the Winding Up Order which the Liquidators identify as being costs of and incidental to these proceedings;

• (ii) Pay Valley Health's costs, such costs to be taxed on an indemnity basis if not agreed.

• (iii) Make a payment on account of Valleys Health's costs in the amount of US$1,043, 606.50 being 50 % of the Petitioner's total costs claimed to 1 April 2020.

The Submissions

3 Mr. Faulkner on behalf of Valley Health submits that Augusta's conduct of the litigation has been unreasonable throughout and should be met with an order for indemnity costs. He submits more particularly that Augusta's Defence to the Petition was hopeless as it was irreconcilable with the contemporaneous documents which detailed in clear and unequivocal terms the breakdown in trust and confidence between the parties as well as Augusta's plan to force Valley Health out of the Company and for Augusta to become the “last man standing”; that the allegations of misconduct and conspiracy made against Valley Health and the Company's independent service providers were improper and that Augusta's failure to make efforts to settle was unreasonable.

4 Mr. Potts QC submits that the Petition raised novel questions of law and that it was reasonable for Augusta to defend the Petition on the grounds that the Company was not a quasi-partnership and that the relationship between the parties had not broken down irretrievably, particularly in light of the fact that the parties continued to work together on a variety of projects even after the Petition was filed and asserted that Augusta had advanced a Defence in which it honestly believed. Mr. Potts also maintains that there was no deadlock of a paralyzing kind, at Board or Shareholder level, and that it had been reasonable to defend the Petition on that ground.

The Costs Rules

5 Section 24(1) of the Judicature Act (2021 Revision) provides that subject to the provisions of the Act or any other Act or rules of Court, the costs of and incidental to all civil proceedings in the Grand Court shall be in the discretion of the Court. Section 24(3) provides that the Court shall have full power to determine by whom and to what extent costs are to be paid.

6 The award of costs on a contributory's petition is governed by Order 24, Part II of the Companies Winding Up Rules, 2018 (“CWR”). O 24, r.8(2) states as follows:

“General Rules as to Costs (O. 24, r. 8)

8. (2) In the case of a contributory's winding up petition under Order 3, Part III, the general rules are that —

(a) if the Court has directed that the company itself is properly able to participate in the proceeding, the general rule is that the costs of a successful petitioner be paid out of the assets of the company; or

(b) if the Court has directed that the winding up petition be treated as an inter partes proceeding between one or more members of the other members or members of the company as respondents, the general rule is that none of the costs should be paid out of the assets of the company and the unsuccessful parties should pay the costs of the successful party, such costs to be taxed on the standard basis unless agreed.

…

(4) The Court shall make orders for costs in accordance with these general rules unless it is satisfied that there are exceptional and special circumstances which justify making some other order or no order for costs.”

7 In this matter the Court directed that the winding up petition be treated as an inter partes proceedings. It follows, despite Augusta's submissions to the contrary, that the costs fall to be paid by Augusta as the unsuccessful party.

Exceptional and Special Circumstances

8 The issue is whether there are exceptional and special circumstances which justify a departure from the general rule that costs be taxed on a standard basis. The parties agree that, in considering whether exceptional circumstances exists justifying a grant of indemnity costs, the Court should apply the same test as under GCR O. 62 r (4)(11) which provides that:

“The Court may make an inter partes order for costs to be taxed on the indemnity basis only if it is satisfied that the paying party has conducted the proceedings, or that part of the proceedings to which the order relates, improperly, unreasonably or negligently.”

9 The authority for this proposition is the decision of Jones J in Wyser-Pratt Eurovalue Fund [2010] (2) CILR 233, who stated that where the Court makes a direction that a contributory's petition should be treated as an inter partes proceeding between the petitioning shareholder as applicant and the other shareholder as respondent, as here, then the purpose and effect of CWR O.24 r 8(2)(b) is that the opposing parties will be subjected to the same costs regime as that which applies to any other ordinary inter partes litigation governed by GCR O. 62.

10 Jones J provided the following exposition on the policy considerations behind the general rule as to costs on a successful contributory's petition under CWR O.24, r.8(2), and the circumstances in which the Court may make “ some other order” pursuant to O.24, r.8(4):

“5. Different policy considerations apply when the court makes a direction pursuant to CWR O.3, r.11(2) that a contributory's petition should be treated as an inter partes proceeding between the petitioning shareholder(s) as applicant and the other shareholder(s) as respondent. Typically, the court will give a direction to this effect if the petition pleads that the company is a quasi-partnership. If the proceeding is characterized as ordinary adversarial litigation between individual shareholders, none of them will be allowed to finance their case out of the company's assets. By virtue of CWR, O.24, r.8(2)(b), the general rule in this type of case is that the unsuccessful shareholder(s) should pay the costs of the successful shareholder(s), such costs to be taxed on the standard basis if not agreed. The purpose and effect of this rule is that the opposing parties will be subjected to the same costs regime as that which applies to any other ordinary inter partes litigation governed by GCR, O.62.

…

…

10 The general principle is that a successful party to any proceeding should be able to recover from the opposing party the reasonable costs incurred by him in conducting that proceeding in an economical, expeditious and proper manner unless otherwise ordered by the court. By definition, such parties are acting against each other's interest. They are incurring legal fees for the purpose of advancing their own case and damaging their opponent's case. The jurisdiction to make such orders for costs is derived from s.24 of the Judicature Law (2007 Revision) and Part II of GCR, O.62. The policy reasons for regulating inter partes orders (sometime referred to as “party-and-party orders”) are different from the reasons for regulating orders for the payment of costs out of a fund. Absent misconduct, inter partes orders are always made on the standard basis.

…

12. An inter partes order for costs to be taxed on the indemnity basis can only be made under Part II of the GCR, O.62 if the court is satisfied that the paying party has conducted the proceedings, or that part of the proceedings to which the order relates, “improperly, unreasonably or negligently.”

11 The Court's discretion to order costs is “extremely wide” and “not fettered or circumscribed”, though “…it must be exercised judicially in the light of the particular facts of each case” as noted by Williams J in Ritter v Butterfield [ 2018 (2) CILR 638] at [38] and [51].

12 Counsel have have helpfully canvassed a number of authorities in their written submissions. I extract from the authorities cited the following cases which set out the relevant principles fully and succinctly as well as the application of those principles to the facts.

Maintaining a Defence which is Manifestly Hopeless

13 Although the award of indemnity costs is concerned with the party's conduct of the proceedings, the inquiry is not unconnected with the merits as was explained by Henderson J in Bennett v Attorney General [ ...