Dealing With Distressed Segregated Portfolio Companies in the Cayman Islands

With the increasing use of segregated portfolio companies (SPCs) as vehicles for investment and (re)insurance in the Caymans Islands, it is important for stakeholders using segregated portfolios (SPs) to understand how these structures may be wound up, and the benefits of appointing receivers rather than liquidators. This article considers the jurisdiction under Cayman Islands law for winding up the affairs of a specific SP via a receivership under the Companies Act (2023 Revision) (the “Act”).

SPs are created and operated by an SPC, and do not have a legal personality separate from the SPC of which they form a part. The defining feature of an SPC is the strict separation of assets and liabilities between the SPC and its various SPs, and between the SPs themselves. The assets and liabilities of each SP within the SPC are ring-fenced, or “absolutely protected”, from the assets and liabilities of all other SPs within the SPC structure and from the general assets and liabilities of the SPC itself. A creditor of an SP therefore only has recourse to the assets of that SP, whereas a creditor of an SPC only has recourse to assets held by the SPC itself, and not to the assets held by the SPs (Sections 219–220, the Act).

SPCs, in the same manner as limited companies, may be wound up voluntarily or by the court, provided that strict segregation of assets and liabilities is maintained in any liquidation (Section 223(1), the Act). Similarly, specific SPs may have receivers or restructuring officers appointed, without impacting on the assets and liabilities of the SPC itself. On previous occasions, the court has also ruled that it has jurisdiction to appoint liquidators over some, but not all, SPs of an SPC.

When the affairs of the portfolio have been wound up, the portfolio may be dissolved even though theSPC is continuing (Section 151(1)–(2), the Act). The receivership of a specific distressed SP will often result in a more time- and cost-efficient winding-up compared to a liquidation of the distressed SP or the SPC as a whole, particularly as receivers are not subject to the same procedural rigours and supervisory functions (and resulting costs) as court-supervised liquidators are. This option also allows the SPC and its solvent SPs to continue as a viable going-concern and therefore avoid any contagion resulting from the isolated distressed SP.

An application for a receivership order in respect of an SP may be made by:

A receivership order may not be made if the SPC is being wound up, and such order shall cease to have effect upon the commencement of a winding-up (Section 224(4)(a), the Act).

A major benefit of the SP receivership regime is that an applicant may file a single petition to wind up any number of SPs within a single SPC, resulting in major efficiencies and reduction in legal expense (Section 224(2), the Act).

Section 224(1) provides that the court may (at its discretion) make a receivership order in respect of an SP where it is satisfied that:

In CMB International Securities Limited v Oakwise Value Fund SPC (CICA (Civil) Appeal No 0009 of 2023), the Court of Appeal recently confirmed that the words “are or are likely to be insufficient to discharge the claims of creditors” provide for a flexible balance sheet test and not a cash flow test. A flexible balance sheet tests involves determining whether the assets, taking into account the actual, contingent and prospective liabilities of the SP, are now or are likely to be insufficient in the reasonably near future to pay the claims of creditors. The petitioner must satisfy the court that:

An unpaid creditor with a presently due undisputed debt is not entitled to a receivership order as of right. The court must also be satisfied that the proposed receivership is being conducted for the purposes set out in Section 224(3) (and not some ulterior purpose), namely:

The court ultimately has discretion as to whether the receivership order ought to be made, having regard to all relevant considerations, including the superiority of the interests of creditors owed undisputed debts over the interests of participating shareholders (which will invariably be subordinate to those of creditors) and the level of insolvency.

Once a receivership order has been made (Section 226(5) and (6), the Act):

The receivership regime therefore presents a commercially efficient avenue for winding up the affairs of a balance sheet insolvent SP, while allowing other solvent SPs to continue unaffected. 

Campbells LLP has acted for successful petitioners in numerous SP receivership cases, including Green Asia Restructure SPC, Bo Run SPC and Re Obelisk Global Fund SPC.