The Grand Court of the Cayman Islands (Kawaley J) handed down a recent decision appointing receivers over a segregated portfolio, in the case of In the Matter of Green Asia Restructure Fund SPC[1]. The judgment is a timely reminder of the unique nature of Segregated Portfolio Companies ("SPCs"), and reconfirms that a different insolvency test applies when seeking the appointment of receivers in respect of segregated portfolios within an SPC.
Seeking the appointment of receivers over a segregated portfolio of an SPC involves a two-step analysis:
- First, it must be proven that the portfolio is insolvent. Section 224(1) of the Companies Act (as amended) (the "Act"), requires that the Grand Court be satisfied "that the segregated portfolio assets attributable to a particular segregated portfolio of the company (when account is taken of the company’s general assets, unless there are no creditors in respect of that segregated portfolio entitled to have recourse to the company’s general assets) are or are likely to be insufficient to discharge the claims of creditors in respect of that segregated portfolio" (emphasis added); and
- Second, once the insolvency test is satisfied, the receivership proposed must also meet the purposes of section 224(3) of the Act, which are for the "… orderly closing down of the business of or attributable to the segregated portfolio" and "the distribution of the segregated portfolio assets attributable to the segregated portfolio …".
As to the first test, Justice Kawaley considered the judgment of Justice Parker in
Re Obelisk Global Fund SPC[2], which determined at paragraphs 35 to 39, that the insolvency test is a ‘balance sheet’ test, rather than a cash flow test
. Justice Kawaley accepted that the proper construction of section 224(1) justified a somewhat fluid balance sheet solvency test applying in order to establish a
prima facie case at least. As to the phrases, "are" or "are likely to be", Justice Kawaley found that, when expressed as alternatives, they must be intended to be different. A creditor could therefore prove either that, a probable deficiency exists, or that the evidence establishes a cogent or real risk of deficiency such that a receiver ought to
prima facie be appointed.
Ultimately, Justice Kawaley agreed with Justice Parker that Parliament must have intended that a more flexible and functional solvency test apply for the appointment of receivers of segregated portfolios of SPCs. Justice Kawaley made two further important comments in relation to the more flexible balance sheet solvency test:
- His Lordship considered that the more nimble nature of SPCs as investment vehicles, and the flexibility of the powers and orders available under the Act (when compared against the more drastic and final remedies involved in a winding up) supported a finding that a flexible balance sheet solvency test was appropriate; and
- The potential risk of prejudice that may flow from an overly flexible solvency test was counterbalanced by the two-step test for the appointment of receivers over segregated portfolio companies. Importantly, even where insolvency is proven, receivers will not be appointed as a right – the overall financial state of the portfolio must be taken into account, and further, section 224(3) of the Act requires than an order must always demonstrate that the business of the segregated portfolio ought properly to be closed down.
In this case, despite the direct evidence only supporting a finding of cash flow insolvency, Justice Kawaley inferred from the failure of the SPC to respond in any evident way to the application to appoint receivers on the grounds of insolvency, that the requisite statutory balance sheet insolvency test was satisfied.
This decision reinforces that the insolvency test for SPCs involves a flexible variation of the balance sheet test, unlike the cash flow test ordinarily applied to determine whether a company ought to be wound up on the grounds of insolvency. A petitioner must, however, always show that the business of the segregated portfolio ought properly to be closed down, in order to obtain orders appointing receivers over such segregated portfolio.
[1] FSD 112 and 113 of 2022 (IKJ) (6 July 2022).
[2] Unreported, FSD 87 of 2021 (RPJ) (12 August 2021).
