HSH Cayman v ABN AMBRO Bank – Examining the Consequences of Non-Compliance with the Companies Winding Up Rules, Cayman Islands Whether one practises under a pre or post Woolf procedural regime it is not uncommon to hear statements to the effect that the rules of the court are intended to be complied with, and not intended to be mere "targets" towards which to aspire. Yet, practitioners have become accustomed to a certain degree of willingness by the courts to exercise its discretion to excuse non-compliance with the rules. After all, the interests of justice may still be achieved even in the face of non-compliance with the rules, once no party is unduly prejudiced and any attendant inconvenience may be adequately compensated in costs. But there are those occasions, rare though they may be, when a non-compliant party is faced with the prospect of having his case struck out; when the seemingly toothless dog that the rules sometimes appear to be has somehow developed the ability to bite.

Whether these occasions arise on an application to dismiss for want of prosecution, or to strike out for failing to comply with peremptory orders, such as for disclosure or the provision of particulars, it is long accepted that a dismissal or strike out will likely occur only in the most extreme cases of "intentional and contumelious default" ; or where there has been a deliberate flouting of the rules after a history of non-compliance ; and even then, only where the sanction of a striking out or dismissal is proportionate to the specific crime of non-compliance , and the offending party's conduct is so egregious as to render further proceedings unsatisfactory.

Many practitioners have come to expect that, with reasonable diligence, the most draconian consequences may be avoided. For that reason, save in the strongest and clearest cases, applications based on non-compliance with procedural rules are often not pursued, being unlikely to succeed. Recent history in the Cayman Islands courts has however demonstrated that what may appear to be innocent, if careless, failures to comply with the provisions of the new Companies Winding Up Rules, 2008 ("CWR"), may result in a winding up order being refused, or, as happened in HSH Cayman I GP Ltd v ABN AMRO Bank NV, if made, set aside by the Court of Appeal.

No Express Provision to grant relief against Non- Compliance

Much of the discussion in the judgment of Court of Appeal in HSH Cayman deals with the fact that the CWR contain no default provision, similar to that contained in Order 2 rule 1 of the Grand Court Rules ("GCR"), that a failure to comply with the requirements of the rules shall be treated as an irregularity, and shall not render the proceedings a nullity. Having carried out an exhaustive examination of the history of the CWR from its enabling statutory parents - section 18 of the Grand Court Law, and section 174 of the Companies Law - to its procedural antecedents - the English Insolvency Rules 1986 – Court of Appeal President Sir John Chadwick concluded that there can under the CWR be no resort to the default provisions in the GCR, nor to equivalent provisions in the English Insolvency Rules, 1986.

It is difficult to believe that the omission was intentional, but the judgment of the Court of Appeal reveals that, for all practical purposes, no lacuna has been created in the court's procedures because, in such circumstances where there is no express procedural power to grant relief from a failure to comply with the CWR, the court may grant relief by resorting to its inherent jurisdiction to regulate its own proceedings.

The Failures of the Judge at First Instance

In HSH Cayman the Court of Appeal set aside the winding up order made by the judge at first instance who, having acknowledged the "regrettable" failures by the petitioner to comply with various provisions of the CWR, stated that the rules are intended to be followed, but, on the basis that there was no prejudice to the companies which were the subject of the winding up petition, invoked the court's inherent jurisdiction, dispensed with compliance and made the winding up orders. The Court of Appeal's reasoning reveals that, all other things being equal, the result would unlikely have been different even if the CWR had included a default provision as in GCR Order 2 rule 1. It appears the court's discretion to grant relief against non-compliance is exercisable on the same grounds whether relief is being granted pursuant to a default provision, as under GCR Order 2 rule 1, or the court's inherent jurisdiction.

According to the Court of Appeal the judge's failure at first instance was that there was no material before him on which he could properly have exercised his discretion to grant relief. As the President points out at paragraph 38: "It is not enough for a party who has not complied with the rules to say to the court: 'My non-compliance has caused no prejudice to the other party': he must provide some reason why the Court should exercise its discretion in his favour."

The Failures of the Petitioner

The specific failures of the petitioner in HSH Cayman, found by the Court of Appeal to be failures of substance and not merely of form, were as follows:

  1. the petition, being a creditor's petition issued in respect of debts due to two or more different creditors, was not separately verified by an affidavit on behalf of each creditor, as required by CWR Order 3 rule 3(2);
  2. the verifying affidavit was not sworn by a director, officer or agent of the petitioner who has been concerned in "and has personal knowledge of the matters giving rise to the petition", as required by CWR Order 3 rule 3(3)(b);
  3. one of the liquidators appointed by the judge was not named in the petition as one of the persons proposed to be appointed, as required by CWR Order 3 rule 2(e);
  4. the affidavit of each of the insolvency practitioners ultimately appointed as liquidators was sworn prior to the date the petition was issued, and therefore could not have been an affidavit "supporting" the petition for the purposes of CWR Order 3, rule 4(1); and
  5. the affidavit verifying the petition and the affidavits supporting the petition were not served "together with" the petition, and were not served "immediately after the petition was presented", as required by CWR Order 3 rule 5.

The Court of Appeal based the importance of complying with the rules relating to the contents and service of the verifying affidavit primarily on the likely serious effect of a winding up order on a company, and the importance of the company satisfying itself at the earliest opportunity as to the merits of the petition. As for the rules requiring the petition to identify the proposed liquidators, the Court of Appeal referred to other requirements in the rules that the petition be advertised to allow other creditors to indicate their support or objection to the proposed liquidators and to nominate alternative liquidators.

The irony of HSH Cayman is that none of the debts upon which the petition was presented was disputed by the companies and, despite the petition having been advertised, there was no evidence of any creditor who opposed any aspect of the petition, the winding up order, or the liquidators appointed. There is no gainsaying the importance of each of the provisions breached by the petitioner. That is not to say however that any of them is disproportionately more important than any of the rules of court for which relief is routinely granted in case of breach, whether pursuant to GCR Order 2 rule 1, or the court's inherent jurisdiction, where there is no evidence of prejudice, or that the breaches were intentional or contumelious, or amounted to an abuse of process. Arguably, therefore, not too much of the ratio decidendi of this judgment might be specifically attributed to the presumed importance of the provisions breached.

Remedying the Breaches

One critical feature of the case is that, rather surprisingly, no specific attempt was made by the petitioner, even in the Court of Appeal, to seek relief from the consequences of non-compliance with the rules. As President Chadwick points out, in order that the petitioner might have been relieved from the consequences of their failure it would have been necessary to seek leave to i) amend the petition to reflect the petitioners' intention as to the persons proposed as liquidators; ii) re-serve the amended petitions; iii) properly verify the petition by a separate affidavit from each creditor; iv) file proper supporting affidavits by the proposed liquidators; and v) re-advertise the petition in its amended form. Had such an application been made, supported by appropriate affidavit evidence explaining the reason for the breaches, it is quite likely that, given the circumstances of the debts not being disputed and no apparent prejudice to any other creditor, they would have been granted.

No new principle - A timely word to the wise

HSH Cayman has provided the legal and insolvency community in Cayman with a thorough examination of the statutory and procedural provenance of the Companies Winding Up Rules, an exercise which is always welcomed where new, untested rules have been introduced. No doubt lawyers will in future exercise much greater care in the preparation and presentation of petitions and seek to avoid the easily avoidable procedural errors made in that case.

The judgment however reaffirms existing principles that, although the rules of court are meant to be complied with, and do not merely set out desirable procedural targets to be aimed at, in appropriate cases, even where there is no express provision in the applicable rules, the court can and will grant relief in the interests of justice. It is only left to practitioners not to deprive themselves of the court's possible bounty by failing to make the appropriate applications.

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