Traded Life Policies Fund (in Official Liquidation) and Penner (as Joint Official Liquidator) v Leach and Eight Others
| Jurisdiction | Cayman Islands |
| Judge | (Morrison, Moses and Birt, JJ.A.) |
| Judgment Date | 21 December 2021 |
| Court | Court of Appeal (Cayman Islands) |
(Morrison, Moses and Birt, JJ.A.)
Civil Procedure — costs — security for costs — order for security for costs set aside where impecuniosity of appellant company caused by respondents
Held, allowing the appeal:
(1) It was common ground that s.74 of the Companies Act (2021 Revision) required the court to adopt a two-stage approach: first, to consider whether it was satisfied that there was reason to believe that if the defendant was successful in the defence, the assets of the company would be insufficient to pay the defendant’s costs, and secondly, if the judge wasso satisfied, to decide as a matter of discretion whether to order security for costs having regard to all the circumstances of the case. The principles applicable to the exercise of the court’s discretion in the second stage were set out by Lord Denning, M.R. in Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. The applicable criteria were (i) whether the claim was bona fide and not a sham; (ii) whether the claim had a reasonably good prospect of success; (iii) whether there was an admission in the defence or elsewhere that some money was due; (iv) whether there was a substantial payment into court or a substantial open offer; (v) whether the application for security was being used oppressively, for example to stifle a genuine claim; (vi) whether the company’s want of means had been brought about by the defendants’ conduct; and (vii) whether the application was made at a late stage of the proceedings (paras. 3–5).
(2) The judge’s order for security for costs was an exercise of discretion. In order to disturb the judge’s conclusions on appeal, the appellants had to show that the judge either erred in principle, that she failed to consider a factor that she should have considered or considered a factor that she should not have considered, or that her decision was wholly wrong. The judge erred by excluding the impecuniosity factor from her consideration altogether. The impecuniosity factor was a matter to be weighed by the court in the overall balance in deciding whether or not to order security for costs. Although it was well established that that factor might not take the matter much further in a case in which the facts surrounding it were tied up with the merits of the case, in the present case it was open to the judge to consider, without reference to the disputed factual and legal issues in the action itself, whether the respondents’ conduct was responsible for TLPF’s impecuniosity. The court disagreed with the judge’s conclusion that the two aspects were so inextricably bound together as to make it difficult to identify a clear factual position in advance of trial. It was therefore open to the court to revisit the matter and, if necessary, to exercise a fresh discretion (paras. 96–98).
(3) Taking into account all the material circumstances of the case, the appellants had made good their opposition to an order for security for costs. On the admitted or not seriously disputed facts, Mr. Leach had in fact been in sole and effective control of TLPF. The judge had erred in drawing a distinction between responsibility (for TLPF’s impecuniosity) and liability, indicating that the two aspects were so inextricably bound together in this case as to make it difficult to identify a clear factual position before trial. Prior to the restructuring, TPF had been, in the view of its directors (including Mr. Leach), at risk of liquidation. In order to forestall that event, it was decided to transfer the portfolio of traded life policies to TLPF, in the hope that the breathing space afforded by the share and bond structure of TLPF would provide an opportunity for maturities to arise, for the TLP market to recover and for new investment to be attracted into the fund. However, in the ensuing period no new investors were attracted to the fund and the directors adopted a discount rate policy for its traded life policiesleading to warnings that that course could result in insolvency. Subsequently, TLPF opted for voluntary liquidation. This was cogent evidence that, looked at broadly, by virtue of the manner in which TLPF was organized as a result of the restructuring and operated by Mr. Leach in its immediate aftermath, TLPF’s want of means to meet any potential costs liability by the time the application for security for costs was made was caused by Mr. Leach and the other respondents. This conclusion involved no element of prejudgment of the substantive issues raised in the proceedings, which remained to be resolved at trial. The appeal would therefore be allowed and the order for security for costs set aside (para. 99; paras. 102–114).
(1) Absolute Living Devs. Ltd. v. DS7 Ltd., [2018] EWHC 1432 (Ch), referred to.
(2) Automotive Latch Systems Ltd. v. Honeywell Intl. Ltd., [2006] EWHC 2340 (Comm), referred to.
(3) Cesar Hotelco (Cayman) Ltd. v. Ryan, 2012 (2) CILR 164, considered.
(4) Chernukhin v. Danilina, [2018] EWCA Civ 1802; [2019] 1 W.L.R. 758; [2018] 4 Costs L.R. 859, referred to.
(5) Deleclass Shipping Co. Ltd. v. Ingosstrakh Ins. Co. Ltd., [2018] EWHC 1149 (Comm), considered.
(6) Everwarm Ltd. v. BN Rendering Ltd., [2019] EWHC 1985 (TCC), referred to.
(7) Fine Care Homes Ltd. v. National Westminster Bank plc, [2019] EWHC 3623 (Ch), referred to.
(8) Griesel v. Grand Cay Devs. Ltd., Cause No. 46 of 2001; on appeal, Civ. App. No. 16 of 2004; 2004–05 CILR N [51], considered.
(9) Hadmor Prods. Ltd. v. Hamilton, [1983] 1 A.C. 191; [1982] 2 W.L.R. 322; [1982] 1 All E.R. 1042; [1982] I.C.R. 114; [1982] I.R.L.R. 102, referred to.
(10) J.M. Bodden & Son Intl. Ltd. v. Dettling, 1990–91 CILR 220, considered.
(11) Mastermailer Stationery Ltd. v. Sandison, [2011] EWHC 4304 (Ch), considered.
(12) Porzelack K.G. v. Porzelack (U.K.) Ltd., [1987] 1 W.L.R. 420; [1987] 1 All E.R. 1074; [1987] 2 C.M.L.R. 333; [1987] E.C.C. 407; [1987] F.S.R. 353, considered.
(13) Roache v. News Group Newspapers Ltd., [1998] EMLR 161, referred to.
(14) Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd., [1973] Q.B. 609; [1973] 2 W.L.R. 632, followed.
(15) Startwell Ltd. v. Energie Global Brand Mgmt. Ltd., [2015] EWHC 421 (QB), referred to.
(16) Walkers v. Arnage Holdings Ltd., 2021 (1) CILR 347; further proceedings, 2021 (2) CILR 277, considered.
Companies Act (2021 Revision), s.74: The relevant terms of this section are set out at para. 2.
The appellants appealed against an order for security for costs.
The first appellant (“TLPF”) was a Cayman Islands investment company which invested in traded life policies or companies that invested in traded life policies. The second appellant was one of two joint official liquidators of TLPF.
The first respondent (Mr. Leach) was at all material times the executive director of TLPF. He was also CEO of the third respondent (“MPL”). The fourth respondent (“Taurus”), a company incorporated in Spain, was TLPF’s administrator. The fifth respondent (“MPL AM”), a company incorporated in Switzerland, was TLPF’s investment adviser. The sixth to eighth respondents were corporate entities which either provided administrative or management services to TLPF or received from or transferred assets to it. The ninth respondent (“TPF”) was a Cayman Islands company which was established by Mr. Leach and a Mr. McClintock (the second respondent, against whom the action had been discontinued) to carry on business as an investment company, investing in traded life policies or companies that invested in traded life policies. It was in effect the predecessor to TLPF.
TLPF had been largely inactive until about September 2013, when, upon the restructuring of TPF which was at risk of liquidation, TLPF received all the assets of TPF, comprising life policies and cash. In exchange for their shares, investors in TPF were issued bonds in TLPF. It was hoped that the market would recover and new investment would be attracted into the fund. However, no new investors were attracted to the fund and the directors adopted a discount rate policy for its traded life policies. Subsequently, TLPF was placed into voluntary liquidation. TLPF’s potential liabilities to bondholders were in the region of US$80.7m.
The appellants commenced proceedings against the respondents alleging breaches of fiduciary duties owed to TLPF and that one or more of the respondents caused or permitted TLPF to overstate and dissipate its assetsby various illegitimate means. The claim also alleged fraudulent trading, that Mr. Leach failed to act as director with reasonable skill, care and diligence, and that the breaches of duty were wilful and dishonest. Substantial damages and/or equitable compensation was claimed. The appellants alleged that Mr. Leach was responsible for the conduct of TLPF’s financial affairs and, as a result of his conduct, TLPF was insolvent prior to the commencement of liquidation. The respondents denied any wrongdoing.
The respondents applied for security for costs pursuant to s.74 of the Companies Act (2021 Revision). They claimed that if TLPF was unsuccessful in its claim against them, it would be unable to meet their costs. The appellants opposed the application on the basis that Mr. Leach was responsible for the insolvent state of TLPF.
Section 74 of the Companies Act (2021 Revision) provided:
“Where a company is plaintiff in any action, suit or other legal proceeding, any Judge having jurisdiction in the matter, if that person is satisfied that there is reason to believe that if the defendant is successful in that person’s defence the assets of the company will be insufficient to pay that person’s costs, may require sufficient security to be given for such costs, and may stay all proceedings until such security is given.”
The judge (Richards, J.) ordered the provision of security for...
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