In August 2022, amendments to the Cayman Islands’ Companies Act (Act) became effective, introducing a new pathway for companies to restructure their affairs in an efficient manner, whilst ensuring that creditors’ interests are protected. Appleby’s earlier articles provide an overview of the key features of the RO regime (click here) and comparison to the pre-existing provisional liquidation regime (click here).
The RO regime has since been sparsely utilised, with only six petitions for the appointment of ROs being filed to January 2024¹. Three of those petitions have resulted in the appointment of ROs², the most recent of which (Holt Fund SPC, handed down on 26 January 2024) held that ROs may be appointed in relation to some (but not all) segregated portfolios of an SPC where the SPC as a whole was not said to be insolvent.
SPCs are a form of company structure in which a single legal entity may have several ‘segregated portfolios’, with distinct assets and liabilities, and with that segregation being respected in liquidation. Click here to listen to Appleby’s podcast regarding structuring an SPC and when and where they may be an appropriate vehicle. Historically, SPCs have been popular structures in the insurance and investment fund sectors.
Returning to the RO regime, section 91B of the Act provides for a two-limbed test for the appointment of ROs: (1) a company is or is likely to become unable to pay its debts; and (2) the company intends to present a compromise or arrangement to its creditors. The decision in Holt Fund focused on an issue arising under the first limb, namely whether the insolvency of one or more of several segregated portfolios could be attributed to an SPC for the purposes of exercising the Court’s jurisdiction to appoint ROs.
Whilst the Court initially expressed reservations as to whether the an SPC could be viewed as unable to pay its debts if one or more of its segregated portfolios was insolvent, it was ultimately satisfied that the statutory test had been met. In particular, the Court relied upon previous authorities in relation to the appointment of liquidators on the basis that some (but not all) segregated portfolios of an SPC met the statutory test for insolvency. It concluded that because “this Court has jurisdiction to wind-up an SPC on the insolvency ground in relation to one or more of its segregated portfolios”, it followed that “restructuring officers could be appointed in relation to some but not all of such a company’s segregated portfolios”.
Holt Fund demonstrates the flexibility of the RO regime and the Cayman SPC structure. If one accepts that a bona fide restructuring is generally preferable to a liquidation, Holt Fund can be commended for its pragmaticism and commerciality.
It is important to point out, however, that Holt Fund was an unopposed decision considering the difficult interaction between three at times conflicting regimes – SPCs, liquidation, and RO appointments. Unsurprisingly then, there are some lingering legal and practical issues with the analysis.
From a legal perspective, Holt Fund is difficult to reconcile with the Court of Appeal’s decision in ABC Company (SPC)-v-J and Company Limited [2012 (1) CILR 300]. While the Judge in Holt Fund noted that the Court of Appeal did not express a view as to whether an individual segregated portfolio could be wound up, that was because the petitioner in that case accepted that this was not possible (as is recorded at [34] of the earlier judgment). Indeed, in Re Virginia Solution SPC (unrep., 10 February 2022, Ramsey-Hale CJ), the Chief Justice noted that ABC Company stood for the proposition that “it is not possible to wind up an individual portfolio of a segregated portfolio company” (at [16]). It is difficult to square that with the gateway provision to the RO regime (s 91A), which provides that it principally applies to “any company liable to be wound up”. Segregated portfolios are not a company, and the prevailing view is that they cannot be wound up (as distinct from the SPC as a whole).
Holt Fund may also present practical problems. It is unclear whether the statutory moratorium in the RO regime would prevent claims being made against the otherwise solvent SPC while the individual segregated portfolios had ROs appointed over them. An ordinary reading of the statute would suggest that is the case. It provides that “no suit, action or other proceedings, other than criminal proceedings, shall be proceeded with or commenced against the company” (s 91G, emphasis added).
It is also unclear whether, as part of swelling the assets available for a restructuring of the segregated portfolios, the ROs would be able to require the SPC itself to contribute to the restructuring from its general assets. Section 221(1)(a)(ii) permits recourse to the general assets of the SPC if a segregated portfolio’s assets are not sufficient to meet its liabilities (unless that is specifically prohibited in the articles or would cause the SPC to breach regulatory capital requirements). If the segregated portfolio’s creditors are deprived of this opportunity to seek contribution from the SPC itself, it would sit uncomfortably with the idea that a restructuring should generally provide a better return that a liquidation.
For these reasons, we expect Holt Fund will not be the last time this issue will be litigated.
