The Grand Court of the Cayman Islands recently upheld the appropriate insolvency test to be applied under section 224 of the Companies Act (Revision 2021) (“Companies Act”) in respect of a company Cayman Islands Separate Portfolio (“SPC”), in a judgment rendered with respect to Obelisk Global Fund SPC (“Fund”) and Obelisk Global Focus Fund (“SP1”).
1. Separate holding companies
An SPC is a single legal entity, which can create an unlimited number of separate, separate portfolios. The assets and liabilities of a separate portfolio benefit from a ‘legal limit’ of the assets and liabilities of (i) any other separate portfolio of the SPC and (ii) the general assets and liabilities of the SPC , under article 216. of the Companies Act. Given the flexibility of the company’s structure, its ability to avoid cross-liability issues between different separate portfolios and to pursue a different investment strategy for each separate portfolio, the SPC is a very strong investment vehicle. popular Cayman Islands for multi-class and / or multi-strategic investment funds. Please see our Information Note Advantages of separate holding companies for investment purposes for more details.
2. Facts of the matter
The Fund is registered with the Cayman Islands Monetary Authority as a mutual fund. Obelisk Capital Management Ltd. (in official liquidation) (“Investment Manager”) is the Cayman Islands investment manager who has provided (i) investment management services to the separate portfolios of the Fund, (including SP1) and (ii) managed the sourcing and pre-financing of auriferous gold from mines in East and West Africa. The Investment Manager was placed into official liquidation on June 26, 2020.
The Fund under SP1 is indebted to the Investment Manager in an amount of approximately US $ 55,000 under a loan transferred by the Fund to SP1 on May 6, 2019 (“Debt”).
The official co-liquidators of the Investment Manager demanded payment of the Debt and issued a statutory request on SP1 on February 10, 2021 regarding the Debt, which was recognized but not paid by SP1. The Investment Manager has applied for a Grand Court receivership order in respect of SP1, based on the insolvency of SP1.
3. Main legal provisions
The liquidation procedures set out in Part V of the Companies Act apply to a “company”, therefore, as a separate portfolio does not have separate legal personality from the SPC, the legal liquidation methods which are available to a company, cannot address itself to a separate portfolio. However, receivership allows a specific separate portfolio to be closed without the need to liquidate the overall structure of the SPC.
Section 224 of the Companies Act sets out the grounds for appointing a receiver over a separate portfolio of an SPC. The main provisions are summarized as follows:
a. Section 224 (1) of the Companies Act provides that the court may make a receivership order in respect of a separate portfolio if the court is satisfied:
I. “That the assets of the separate portfolio attributable to a particular separate portfolio of the company (when taking into account the general assets of the company, unless there is no creditor in respect of this portfolio separate authorized to use the general assets of the company) are or are likely to be insufficient to discharge the claims of creditors with regard to this separate portfolio ”; and
ii. the issuance of a receivership order would achieve the objectives of “the orderly closure of the business or attributable to the separate portfolio” and “the distribution of the assets of the separate portfolio attributable to the separate portfolio to those entitled to resort to it ”.
b. Section 224 (2) of the Companies Act provides that a receivership order may be made in respect of one or more separate portfolios.
4. Balance sheet test vs cash flow test?
SP1 did not dispute that the debt is owed by SP1, the amount of the debt or the sum of the debt is greater than the legal minimum for a legal claim under section 93 (a) of the Act on corporations.
However, the lawyer for SP1 opposed the request for receivership concerning SP1, for a number of reasons, in particular the fact that it had not been shown that SP1 “has or is likely to have insufficient assets to meet the claims of its creditors “. It has also been argued that if SP1 is found to be “balance sheet solvent” in the long term, the court cannot order the appointment of a receiver.
Counsel for the investment manager argued that the relevant insolvency test should be either by reference to a “cash flow test” or a “balance sheet test” and submitted to the Court that a cash flow should be used.
a. Cash flow test: A business is deemed insolvent on the cash flow test if it cannot pay the debts currently due or if, on the balance of probabilities, it does not or will not have the resources to pay off debts that will fall due in the reasonably near future.
b. Balance sheet test: A company is insolvent according to the balance sheet test if its assets do not exceed its liabilities, taking into account contingent and prospective liabilities.
Counsel for the investment manager argued in court that there is no case in Cayman Islands court where a claimant must prove that an entity is insolvent on its balance sheet. In addition, it has been argued that a balance sheet test would raise evidentiary issues for a claimant (i) as a creditor would generally not have access to the books and accounts of the relevant company (especially with respect to a company of the Cayman Islands, for which there is no legal obligation to render public accounts) and (ii) the valuation of assets is not an easy task, even if a creditor has access to the relevant information.
5. The Court’s decision
As the debt was settled before the judgment in this case was rendered, the judgment only covered the jurisdictional aspects of the application for sequestration of the separate portfolio by the investment manager.
The judge in the case, Justice Raj Parker, did not accept that the wording of Section 224 (1) of the Companies Act amounts to an insolvency cash flow test – in particular, it It was noted that no language regarding debt and timing of payment is included in this subsection.
The Court ruled that on reading section 224 of the Companies Act:
a. the test for whether the Court has jurisdiction to issue a receivership order in respect of a separate portfolio is whether the assets of a company are or are likely to be sufficient to meet the claims of creditors , which can be viewed as its liability, i.e. a balance sheet test, rather than a cash flow test; and
b. this involves determining, on the basis of the audit evidence available, whether the assets are sufficient at present or are likely to be sufficient in the reasonably near future when measured against its liabilities (including forward-looking liabilities and possible) and are held in a form that allows them to be used to pay the claims of creditors.