The Grand Court of the Cayman Islands recently confirmed expressly for the first time that it has jurisdiction to wind up a segregated portfolio company ("SPC") on the insolvency of one or more, but not all, of its segregated portfolios, and to appoint restructuring officers over those segregated portfolios. The judgment is In the matter of Holt Fund SPC (Unreported, 26 January 2024, FSD 309 of 2023 (IKJ)).

Background

Holt Fund SPC (the "Company") is an SPC that operates as an investment fund through four segregated portfolios. The Company and its portfolios are structured in a typical way, whereby the Company holds no assets and the liabilities are assumed only in respect of the individual portfolios. Following a series of interest rate rises in the United States, two of four portfolios encountered financial difficulties.

On 17 October 2023, the Company petitioned to the Court seeking the appointment of joint restructuring officers in relation to two segregated portfolios pursuant to section 91B of the Companies Act (2023 Revision) (the "Act") on the grounds that the Company: is or is likely to become unable to pay its debts; and intends to present a compromise or arrangement to its creditors.

The key question before the Court was whether it has jurisdiction to wind up an SPC and appoint restructuring officers on the insolvency of one or more, but not all, of its segregated portfolios.

Jurisdiction

Regarding the relevant statutory jurisdictional test, Justice Kawaley readily accepted the Company's submissions that restructuring officers can be appointed over an SPC under section 91B of the Act on the basis that an SPC is a company which is liable to be wound up.

Section 91B provides that a petition may be presented to the Court for the appointment of restructuring officers on the grounds that the company:

• is or is likely to become unable to pay its debts within the meaning of section 93; and
• intends to present a compromise or arrangement to its creditors.

Section 91A(a) defines "company" for the purposes of section 91B as "any company liable to be wound up under section 91". Section 91, then, confers the Court's jurisdiction to make winding up orders in respect of, inter alia, "a company incorporated and registered under this [Act]". Section 213(1) provides that "any exempted company may apply to the Registrar to be registered as a segregated portfolio company".

Accepting that an SPC falls within this statutory framework, the Court then had to determine that the Company was unable, or likely to become unable, to pay its debts in accordance with section 91B of the Act. In this regard, section 93 of the Act provides that a company shall be deemed unable to pay its debts if, inter alia, "it is proved to the satisfaction of the Court that the company is unable to pay its debts". Accordingly, the key issue falling to be determined by the Court was whether the Company was unable to pay its debts on the basis that one or more of its segregated portfolios was insolvent.

Inability to pay debts

Considering the issue before the Court, Justice Kawaley noted that section 223 of the Act expressly modifies the winding up procedure for SPCs, such that a liquidator must keep portfolio assets separate and separately identifiable from the general assets of the company and must maintain this segregation when distributing assets. Notably however, the statutory regime makes no express modification to the insolvency test applicable to winding up petitions in relation to an SPC. His Lordship noted the distinction between this and the Bermudian SPC regime, which does modify the applicable insolvency test (and specifically states that liabilities of SPs cannot be taken into consideration when determining the solvency of the SPC) and held that in the absence of such express statutory language there were no grounds for inferring such legislative intent. Kawaley J held, therefore, that the applicable test for insolvency of an SPC was the standard test used in the context of winding up petitions: one of cashflow insolvency.

Regarding which debts could be properly characterised as debts of the Company, Justice Kawaley accepted the recent decision in Re Coinful (Unreported, 5 July 2023) as precedent for the proposition that insolvency as a ground for winding up an SPC may be established by reference to the liabilities of a particular segregated portfolio. He also accepted the Company's submissions that Performance Insurance Company SPC (Unreported, 6 April 2022) provided authority for the same notion; and that official liquidators could be appointed over specific segregated portfolios. Once satisfied with the Court's jurisdiction in this regard, Justice Kawaley held that restructuring officers could similarly be appointed over particular segregated portfolios without undermining the integrity of the SPC statutory regime.

Commentary

The decision illustrates the flexibility of the Cayman Islands SPC regime compared with both 'traditional' companies and corresponding SPC regimes in other jurisdictions. It is a welcome addition to the insolvency and restructuring jurisprudence and will provide comfort to investors who are not confined to appointing receivers over a portfolio or liquidating the SPC as a whole where certain portfolios experience financial difficulties. As an uncontested application, it remains to be seen whether the jurisprudence develops further as a result of future contested applications with full argument.

[View source.]