It is not unusual for liquidators of an insolvent company to pursue the company’s former directors for damages caused by breaches of directors’ duties in the period leading up to the insolvency. In this scenario the directors, if sued, will usually apply for security for their costs of defending the proceedings. For a liquidator of an insolvent company with few assets, the prospect of having to provide security can act as a significant deterrent to bringing the claim in the first place or to continuing with the claim once the court orders the company to provide security for costs.
One of the grounds on which the Cayman court can (and often will) refuse to order a company to provide security for costs is that the defendants themselves were the cause of the very impecuniosity on which they rely as the reason why the company should provide security. The point is very commonly taken by companies in security applications where the company is seeking damages as a remedy. In these cases it is almost always the company’s argument that the financial loss that forms the basis of the damages claim was caused by the defendants, that had the defendants not done so the company would not be impecunious and that the company should not therefore be required to provide security.
That argument runs into a difficulty in most cases, which is that the court will not assess the merits of the underlying dispute at the security for costs stage. Often those underlying merits and the facts surrounding the impecuniosity are so bound up together that they cannot be sufficiently disentangled at the security hearing. As a result, the responsibility for the company’s impecuniosity is not proved or even investigated at the security hearing stage and the liquidator is faced squarely with the deterrent of an order for security.
The decision in Traded Life points to a way around this difficulty. The Court of Appeal in Traded Life held that a party can be denied security for costs if the undisputed facts about the directors’ management of the company disclose that the directors are responsible for the company’s impecuniosity. Responsibility (which can in certain cases be determined at the security for costs application) being a broader notion than legal liability (which must normally wait to be decided at a later trial).
BACKGROUND
Traded Life Policies Fund (“TLPF”), a Cayman Islands company in official liquidation (acting through its joint official liquidators) brought claims against, among others, a former director of TLPF alleging that he had breached his fiduciary duties by causing and/or permitting TLPF to dissipate its assets by various illegitimate means including obvious and dramatic mismarking of asset values and overpaying fees charged by related party service providers which the former director controlled and/ or had a personal financial interest. These claims arose against the backdrop of a restructuring whereby TLPF was established as a new investment vehicle for Trade Policies Fund (“TFP”), TLPF’s predecessor fund, to try to avoid the threat of liquidation of TFP.
THE DECISION OF THE GRAND COURT
The former director and his co-defendants had succeeded in obtaining an order for security for costs against TLPF from the Grand Court. The basis of that order was that TLPF was impecunious (or “want of means”) and so the defendants had no prospect of recovering their costs if successful at trial.
TLPF appealed on the basis that the Court had not considered that the defendants were responsible for TFPL’s want of means – the so-called “impecuniosity factor”. On that point, the Court had concluded that it could not be said that the former director had “ran the ship onto the rocks” without there being an admitted or undisputed fact which identified clearly that he did so, and how, because the underlying merits of the case could not be considered at the security hearing.
THE DECISION OF THE CICA
The CICA agreed with TLPF on appeal. The Grand Court had not considered and given weight to the impecuniosity factor. A decision should have been reached as to the responsibility for TFPL’s impecuniosity on the basis of the admitted, or not seriously disputed, evidence available, which could be done without getting into the underlying merits of the claim. That evidence included an affidavit from the former director himself, as well as reports from TLPF’s auditors and consulting actuaries. This would still have allowed the Court to go on to deal with the underlying merits at trial.
The CICA went on to hold that, as a result of how (i) TLPF was organised after the restructure and (ii) operated by the former director immediately afterwards, TLPF’s want of means was caused by the former director and his co-defendants. The security for costs order was accordingly set aside by the CICA, and the case against the former director and his co-defendants continues.
[1] Unreported, CICA (Civil) Appeal No 18 of 2021, 21 December 2021
