Insolvency And Restructuring: Cayman Islands Segregated Portfolio Companies

• Published date: 11 June 2020
• Author: Ms Jennifer Fox
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Ogier

May 2020 marks the twenty second anniversary of the Cayman Islands segregated portfolio company ("SPC").¹ This article takes a look back at the SPC's first two decades and particularly the principles established by the courts concerning insolvent SPCs. These cases have posed some interesting and novel questions for the Cayman courts to resolve and the decisions have put flesh on the bones of the statutory provisions as regards the status, duties and powers of office holders appointed in connection with SPCs.

What is it?

An SPC is an exempted company that is permitted to create segregated portfolios in order to legally segregate the assets and liabilities of the portfolios from each other and from the general assets and liabilities of the SPC itself. The utilisation of these innovative legal structures has developed considerably since their first introduction in May 1998. Initially limited to use by licensed insurers, they are now popular investment vehicles employed across the spectrum of financial services offerings wherever there is a need to set up a statutory ring fencing of assets and liabilities. The SPC structure is widely used by investment funds, captive insurers, and in structured finance transactions.

Treatment in Insolvency Situations

Part XIV of the Cayman Companies Law (2020 Revision) (the "Law") provides for the establishment and operation of SPCs and their treatment in insolvency situations. Under the Law, the portfolios of an SPC do not constitute separate legal entities; however, in practical terms, they operate like separate limited liability companies and the assets and liabilities of each portfolio are ring fenced: with the effect that shareholders and creditors have recourse only to the assets of the particular portfolio to which their shares are allocated. Liabilities of one portfolio cannot be met by the assets of another; nor can they be met from the general assets of the SPC where this is prohibited in the articles of association (which is the usual position). When a portfolio is insolvent the Court may appoint a receiver to realise and distribute its assets. Official liquidators may only be appointed over the entire SPC. The effect of Part XIV is that the insolvency of one portfolio does not contaminate the other portfolios of an SPC. As shall be seen from the below survey of the cases, this principle has faced challenge, but has ultimately been upheld by the Cayman courts.

ABC Company (SPC) v J & Co. Ltd

In the matter of ABC Company (SPC) v J & Co. Ltd, the Court of Appeal reversed the Grand Court's decision not to strike out a petition to wind up ABC brought on the just and equitable grounds. The SPC had suspended the calculation of net asset value for several years and the payment of redemptions in a number of its portfolios. The investment manager was winding down the suspended portfolios so as to make distributions over time. The remaining portfolios (at least two thirds) were still trading normally, were accepting subscriptions and were paying redemptions in the usual way. Nevertheless, a petition to wind up the entire SPC was filed by a shareholder in one of the suspended portfolios on the grounds that the SPC had lost its substratum and that it was just and equitable that the SPC be wound up.

On appeal, the petitioner accepted that: (a) the Court had no jurisdiction under the Companies Law to wind up an individual portfolio; (b) the appointment of a receiver over a portfolio was only available if the assets attributable to that portfolio are or are unlikely to be insufficient to meet the liabilities of creditors to that portfolio (ie it is balance sheet insolvent) but not on a just and equitable basis; and (c) the only remedy was to seek to wind up the entire fund on the just and equitable grounds. Upon a review of the SPC's articles of association and offering documents, the Court of Appeal held that the petitioner had no realistic prospect of establishing that, as a result of the failure of certain segregated portfolios, the SPC had ceased to carry on business in accordance with the reasonable expectation of its shareholders nor was there any other basis upon which it was or could be said that the SPC as a whole had lost its substratum. This decision was the first case to affirm the proposition that the statutory segregation of an SPC's Portfolios will be upheld by the Cayman Courts.

The Axiom Portfolios

2012 and 2013 saw further welcome clarification of the status, duties and powers of receivers appointed over a portfolio. In the 2012 case of JP SPC 1 and JP SPC 4, winding up petitions were presented by the directors of two SPCs. A feeder SPC had six portfolios, one of which was the Axiom Legal Financing Fund ("Axiom") representing 74% of the SPCs' investors. Axiom's only assets were its shares in Axiom Legal Financing Fund Master SP, the master portfolio. The assets of the master portfolio were receivables from loans made to a number of English law firms conducting class actions. Allegations had been made concerning the activities of the Investment Manager of Axiom and the master portfolio. Initial analysis suggested that the value of the loans had been overstated and further investigations were necessary. Notwithstanding the principles confirmed in ABC, one of the investors originally sought to argue that despite the health of the other unaffected portfolios, the whole SPC should be wound up. The investor ultimately agreed that the appropriate course was for receivers to be appointed over the Axiom portfolios, and receivership orders were made.

The Axiom receivers subsequently returned to the Grand Court to seek directions clarifying their duties and powers so as to bolster an (ultimately successful) application for their recognition in England under the English Cross Border Insolvency Regulations 2006 (the "Regulations") which have their roots in the UNCITRAL model law on Cross Border Insolvency. Ordinarily, receivers in their traditional role do not qualify for such recognition, but the Regulations take a...