A trojan horse for creditors of Cayman companies

7 February2017

First published in Cayman Financial Review in February 2017

Access to justice is a fundamental right in developed legal systems. But, as with many rights, a balance has to be struck. The right of one citizen to seek redress from the courts must be weighed against the right of another not to be put to the expense of defending bad claims.

Historically, the Cayman Islands has addressed this through the allocation of liability for the costs of legal proceedings. In this regard, it is like many common law jurisdictions, with the notable exception (for most purposes) of the United States. But when it comes to the right of creditors of insolvent Cayman companies to challenge decisions by the appointed liquidators, a recent amendment to the Companies Winding Up Rules changes all that. The amendment appears to be a gift to those claiming to be creditors, but may actually leave genuine creditors worse off than before. In this article, the authors call for this change to be reconsidered, rather than leaving true creditors of an insolvent estate vulnerable to the unmeritorious claims of false creditors.

Costs follow the event

The Cayman Islands follows the England and Wales approach that the loser in litigation pays – or “costs follow the event.” Subject to the principles governing the nature and extent of costs that may be claimed, this means that the party that has (by definition, wrongly) forced the other side to court, pays the other side’s costs of the action in addition to its own.

Those costs recoveries are important. In jurisdictions where plaintiffs are able to bring claims with impunity, this can be combined with “no-win no-fee” arrangements to make speculative claims more common and result in settlements that are leveraged as a result of nuisance value rather than merit. For a plaintiff, the risk of having to bear the other side’s costs of being unsuccessful is a powerful deterrent to bringing claims that do not have real merit. In a system where the costs of pursuing legitimate rights are recovered, access to justice is preserved.

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