The IIF reported that there was an almost four-fold increase to USD160 billion in bonds issuance with a sustainability-linked pricing ratchet in the first six months of 2021 compared against the prevous year. Market participants almost certainly drove this increase because they recognised that implementing a sound ESG strategy facilitates access to new pools of capital and opportunities to lock-in favourable pricing.

For example, SSAB, a Swedish company that aims to be the first fossil fuel-free steel producer, has issued a USD230 million equivalent five-year senior unsecured sustainability-linked bond with a maturity date of 2026. Under the terms of the relevant bond instruments, a redemption premium will be payable at maturity if SSAB fails to meet specific sustainability performance targets linked to greenhouse gas emissions. We expect the volume of sustainability-linked bonds to continue to grow in 2022.

The IIF has also reported that about 85% of all ESG-linked debt issuances occur in Europe and North America. However, there is evidence that ESG-linked debt is gaining traction in other regions. For example, Chinese real estate company Minmetals Land, Japanese real estate group Mori Hills, and India’s Adani Electricity Mumbai have brought, or are reportedly planning to bring, various sustainable and green bonds to market.

In contrast to green bonds, where proceeds are used in certain green projects, general sustainability-linked financings have also been used for various corporate purposes and are based on specific ESG targets, rather than a limited set of green projects. This has further opened the market to a broader spread of issuers, a trend that we expect to continue in 2022.

With a growing focus on ESG-linked products, standards have intensified. While there are now a raft of regulations and proposals in the market, such as the Green Loan Principles, the European Green Bond Standard and the Sustainable Finance Disclosure Regulation, there are concerns that greenwashing may cloud the distinction between genuine ESG-linked debt issuance and opportunism.

Therefore, lenders and other finance parties committed to monitoring compliance with ESG targets must agree on reporting standards with the relevant obligor group, and must ensure appropriate external review mechanisms are implemented.

Companies in the British Virgin Islands (BVI) and the Cayman Islands are widely used in cross-border finance transactions, including those with ESG-linked investing elements. These jurisdictions have various features that make them attractive to lenders and other finance parties, as well as borrowers and other obligors for ESG-linked financings. Some reasons for this are:

• The BVI and the Cayman Islands are widely recognised as creditor-friendly jurisdictions due to the range of self-help remedies available to secured creditors in an enforcement. The BVI also has a straightforward system of registering security interests that protects the priority of security interests.
• BVI and Cayman Islands companies may have unlimited objects and purposes, including in relation to ESG initiatives, and there is significant flexibility in how such companies are structured in terms of capital structure, management roles and shareholder involvement.
• BVI and Cayman Islands companies are subject to low ongoing maintenance costs. Financial statements do not need to be prepared in relation to companies that are not regulated by the BVI Financial Services Commission or the Cayman Islands Monetary Authority.
• Except for the payment of nominal filing fees in connection with the optional filing of a security interest that is granted by a BVI chargor, there are no income, corporate or capital gain taxes, withholdings, levies, registration taxes, or other similar taxes or charges imposed on companies in the BVI or the Cayman Islands in connection with the execution, delivery or performance of finance documents by a BVI or a Cayman Islands company, or the finance parties.

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PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong
Contact details:
T: +852 5225 4920
E: peter.vas@loebsmith.com

What are the key laws and other sets of rules that govern Cayman Islands’ investment funds?

Open-ended funds

The Mutual Funds Law (for open-ended funds) and the Private Funds Law (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. The Cayman Islands Monetary Authority (CIMA) is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement. The Mutual Funds Law defines a mutual fund as “a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments …” The reference to “equity interests” means that debt instruments (including warrants, convertibles and sukuk instruments) are excluded and funds issuing such instruments will not be required to register with CIMA as a mutual fund.

Limited Investor Funds

The scope of regulation extends to Cayman incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Changes to the Mutual Funds Law means that certain mutual funds, which were previously exempted from registration with CIMA because they had 15 investors or less, the majority of whom have the power to appoint and/or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the corporate structure used for the fund) (Limited Investor Funds), are no longer exempt from registration with CIMA. Limited Investor Funds are now required to be registered with, and are regulated by, CIMA.

Audit Requirement

Each CIMA registered mutual fund is required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six months of the end of each financial year of the mutual fund (along with an Financial Annual Return in CIMA’s prescribed form).

Single Investor Fund

Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Law. Nonetheless, a mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.

Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.

Registration of Directors

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Law (DRLL). The DRLL enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLL who are directors of closed-ended funds that fall within the scope of the Private Funds Law. However, this may change in the future.

Closed-ended funds

The Private Funds Law requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds Law applies to private equity funds, real estate funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies. The Private Funds Law also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands.

In addition to registration with CIMA, the Private Funds Law also imposes the following regulatory requirements to be met by private funds:

Audit

Each private fund is required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six months of the end of each financial year of the private fund (along with a financial annual return in CIMA’s prescribed form).

Valuation of assets

A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Private Funds Law. Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.

Safekeeping of fund assets

The Private Funds Law requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.

Cash monitoring

The Private Funds Law requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):

to monitor the cash flows of the private fund;

to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and

to ensure that all payments made by investors in respect of investment interests have been received.

Identification of securities

A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities that it trades and holds and make this available to CIMA upon request.

Anti-Money Laundering

All investment funds are required to comply with Cayman Islands anti-money laundering legislation and regulations, including appointing an anti-money laundering compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. The Cayman Islands government and CIMA actively work with the European Union, the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to observe and maintain international standards on transparency, and good corporate governance.

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In The Matter of Padma Fund L.P. [FSD 201 of 2021] (RJP), the Cayman Grand Court held that the Cayman Court does not have jurisdiction to order the winding up of a Cayman exempted limited partnership (“ELP”) on the basis of a creditor’s petition for the winding up of the ELP. The Court ruled that the correct procedure for a creditor to follow is to commence proceedings against the general partner of the ELP for an unpaid debt. This case has clarified the process for creditors’ claims against ELPs but has also in the process added some interesting scenarios to consider for a general partner. This is particular interesting in light of the fact that ELPs are commonly used for private equity, venture capital and other investment funds and therefore the ruling provides guidance for not only general partners but also investors and creditors.

In the Padma case, the petitioners presented the petition in July 2021 seeking orders from the Court for the winding up of Padma Fund L.P. (the “Partnership”) on the basis that the Partnership is unable to pay its debts and therefore should be wound up pursuant to section 92(d) of the Companies Act (2021 Revision), as applied by section 36(3) of the Exempted Limited Partnership Act (2021 Revision).

If, as the Court ruled, the remedy of any creditor of an ELP is to commence proceedings against the general partner, how will this impact on the use of foreign companies which are sometimes registered in Cayman in order to become the qualifying general partner of the ELP? How easy will it be to successfully bring a winding up petition in Cayman against a U.S. domiciled company registered in Cayman as general partner of an ELP which can apply for Chapter 11 debtor in possession protection in the U.S.?

Will the Court’s decision, perhaps over time, change the often seen practice of having one general partner in respect of several ELPs in order to, among other things, consolidate and maintain control of several ELP investment funds? The general partner holds the assets of each ELP on statutory trust. If a winding up order is made against the general partner of an ELP, and there is a shortfall in the ELP’s assets available for distribution to creditors, the liquidator appointed has a claim against the separate assets (if any) of the general partner and such claim would constitute an unsecured claim in any liquidation of the general partner. The use of one general partner to manage and control large numbers of ELP investment funds brings the solvency of such general partner more into focus.

This blogpost is not intended to be a substitute for specific legal advice or a legal opinion on the laws governing limited partnerships in the Cayman Islands. For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: robert.farrell@loebsmith.com

A Cayman Islands merger take-private is the process whereby two “constituent companies” – namely, a Cayman Islands company (“MergerCo.”) and a listed Cayman Islands company (the “Target”) – merge pursuant to Part XVI (the “Cayman Merger Law”) of the Cayman Companies Act (2021 Revision) (the “Cayman Islands Companies Act”). Upon the merger becoming effective (the “Effective Time”):

(a)  MergerCo. is struck-off the register of companies;

(b)  the rights and property of the constituent companies vest in the Target as the surviving company; and

(c)  subject to any specific arrangements entered into by the relevant parties, the Target is liable for and subject to all mortgages, charges and security interests, and all other liabilities of the constituent companies.

The following is a summary of the key steps that need to be taken from a Cayman Islands law perspective in order to consummate a statutory merger:

1. Forming MergerCo. In a typical take-private transaction, MergerCo. is incorporated in the Cayman Islands by the investors adhering to the takeover group (often involving the founders/managers of the listed company, its parent company and/or several private equity investors acting as sponsors for the purposes of the take-private transaction) (the “Buyout Group”) in order to obtain finance and ultimately merge with the Target.

2. Take-Private Offer. After obtaining legal and financial advice, the Buyout Group agrees on the terms of the proposed merger take-private, including the consideration which will be offered to the shareholders of the Target, and makes an offer to the board of directors (the “Board”) of the Target (the “Initial Take-Private Offer”). As a matter of best practice, since most take-private transactions are initiated by, or with the involvement of, the management or certain shareholders represented at Board level, the merger process requires that a special committee formed of independent directors of the Target (the “Special Committee”) be designated to review the take-private offer and negotiate on behalf of the Target with the Buyout Group. This is both to ensure that the Board is in compliance with the fiduciary duties it owes the Target, and to avoid any accusation of self-dealing.

3. Negotiations. The Special Committee reviews and negotiates the offer with the help of its own independent legal and financial advice. Overall, the typical mission of the Special Committee is to:

(a) investigate and evaluate the Initial Take-Private Offer;

(b) discuss and negotiate the terms of the merger agreement (the “Merger Agreement”);

(c) explore and pursue any alternatives to the Initial Take-Private Offer as the Special Committee deems appropriate, including maintaining the public listing of the Target or finding an alternative buyer;

(d) negotiate definitive agreements with respect to the take-private or any other transaction; and

(e) report the recommendations and conclusions of the Special Committee to the Board with respect to the Initial Take-Private Offer.

4. Board Approval. The directors of each constituent company in a merger are required to approve the terms and conditions of the proposed merger in a written plan of merger (the “Plan of Merger”), including, among other things:

(a) how shares in each constituent company will convert into shares in the surviving company or other property (e.g. cash payable to shareholders);

(b) what rights and restrictions will attach to the shares in the surviving company;

(c) whether the memorandum of association and articles of association of the surviving company will be amended and, if so, then how; and

(d) any amounts or benefits paid or payable to any director of either constituent company or the surviving company consequent upon the merger.

5. Shareholder Approval. The Plan of Merger is required to be authorized by a special resolution of the shareholders of each constituent company who have the right to receive notice of, attend and vote at the relevant shareholders’ meeting, voting as one class with at least a two-thirds majority. The resolutions of the MergerCo are often passed by its shareholder(s) unanimously in writing. 


6. Consents. Each constituent company must obtain the consent of any creditor(s) holding a fixed or floating security interest in the relevant company. To the extent that debt finance is being provided in the context of a privatization, the consent of any relevant secured creditor(s) are typically included in the intercreditor agreement if there is one, or in the relevant facility agreement if there is not. Any other relevant authorizations and consents, such as under the articles of association of a constituent company or pursuant to any regulatory laws, must also be obtained prior to consummation of the merger. 


7. Declarations, Undertaking and Certificate of Good Standing. A director of each constituent company must provide a written declaration which confirms:

(a) that the relevant constituent company is, and the surviving company will be, immediately after the merger, able to pay its debts as they fall due;

(b)that the merger is bona fide and not intended to defraud unsecured creditors of the constituent companies;

(c) that no petition or other similar proceeding has been filed and remains outstanding and that no order has been made or resolution adopted to wind-up the relevant constituent company in any jurisdiction;

(d)that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the relevant constituent company, its affairs, or its property or any part thereof;

(e)that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the constituent company are, and continue to be, suspended or restricted;

(f ) the assets and liabilities of the relevant constituent company made up to the latest practicable date before the making of the declaration;

(g) in the case of a constituent company that is not the surviving company, that the relevant constituent company has retired from any fiduciary office held or will do so immediately prior to the merger; and

(h) that the relevant constituent company has complied with any applicable requirements under any relevant regulatory laws.

A director of each constituent company must also undertake to give a copy of the certificate of merger to all of its members and creditors, and to publish a notification of the merger in the Cayman Islands Gazette.

A certificate of good standing must also be obtained by each constituent company.

8. Filing and Registration. After obtaining all necessary authorizations and consents, the Plan of Merger is required to be signed by a director on behalf of each constituent company and filed with the Cayman Islands Registrar of Companies (the “Cayman Islands Registrar”) along with the other merger documents detailed above. The Cayman Islands Registrar registers the Plan of Merger and issues a certificate of merger so long as all of the requirements of the Cayman Merger Law have been complied with. A certificate of merger is prima facie evidence that all such requirements have been complied with. It is market practice to pre-vet unsigned copies of all of the merger documents with the Cayman Islands Registrar prior to filing them to ensure that all of the requirements of the Cayman Merger Law will be complied with upon submission.

Unless the Plan of Merger provides for a later specified date or event , the merger will be effective on the date that the Plan of Merger is registered by the Registrar of Companies. At the Effective Time, all of the rights and assets of each of the constituent companies immediately vests in the surviving company and, subject to any specific arrangements, the surviving company assumes all of the assets and liabilities of each of the constituent companies.

Each shareholder of a constituent company is entitled to payment of the fair value of its shares upon dissenting from the merger under section 238 of the Cayman Islands Companies Act. Fair value can either be agreed between the parties or determined by the Cayman Court. There is considerable case law with respect to the meaning of “fair value” and that is outside the scope of this article.

Many take-private transactions are financed by a combination of cash, equity and debt in our experience.

With respect to equity commitments, the investors adhering to the Buyout Group typically execute an equity commitment letter undertaking to finance the transaction, subject to completion of the merger and any regulatory approvals. They typically also provide guarantees for any costs and expenses and termination fees in case the merger is not completed. Within the Buyout Group, relations between the various parties are governed by an interim investors’ agreement or a consortium agreement, which is negotiated prior to finalizing the merger terms.

A portion of the financing that is needed for a merger is typically provided by one or several banks, through a bilateral or a syndicated lending facility, or in the form of a bridge loan that is to be repaid shortly after the completion of the merger. As there is no prohibition on financial assistance under Cayman Islands law, a company may fund or guarantee the acquisition of its own shares, as long as the transaction taken as a whole is deemed by its board of directors as being in the best interests of the relevant company.

The security package that is put in place will ultimately depend on the creditworthiness of the borrower group and other commercial considerations, but as a general rule will include:

(a) an equitable share mortgage over the shares of MergerCo. prior to the Effective Time (the “Merger Sub Share Security”);

(b) an equitable share mortgage over the shares of the Target from the Effective Time;

(c) security over the assets of MergerCo. prior to the Effective Time (the “Merger Sub Asset Security”); and

(d) security over the assets of the Target from the Effective Time (the “Target Asset Security”).

It is worth noting that:

(a) the Merger Sub Share Security sometimes contains an automatic discharge provision from the Effective Time, but certain lenders resist this in case the merger is subsequently unwound;

(b) many lenders are happy to rely on a debenture that is entered into as part of the Merger Sub Asset Security package for the purposes of the Target Asset Security, though the security is typically drafted to make clear that it will attach to the Target’s assets from the Effective Time; and

(c) the register of mortgages and charges of the Target at the Effective Time should include details of the security interests granted by MergerCo. prior to the Effective Time as the Target is, subject to any specific arrangements, liable to all such security interests.

Copies of the following merger specific conditions precedent typically need to be delivered to the lender(s):

(a) the executed merger documents (other than the Plan of Merger), which usually include the acquisition agreement, the company disclosure schedule and any other document designated as a “merger document”;

(b) the agreed form Plan of Merger, which is typically expressed to be subject to any amendments recommended by the Cayman Islands Registrar;

(c) the form of constitutional documents and statutory registers to be issued by the registered office service provider of the Target at the Effective Time;

(d) a merger costs certificate, which is usually satisfied by providing a funds flow statement;

(e) a merger conditions certificate with respect to the satisfaction of conditions under the Merger Agreement, as well as certain solvency conditions;

(f) the corporate authorizations, which include board and shareholder resolutions of the constituent companies and resolutions of the Target’s special committee;

(g) the “section 233(9) documents”, which include the declarations and undertaking referenced above, as well as a certificate of good standing in relation to each constituent company; and

(h) the secured creditor consent.

In our experience, closing of the merger typically occurs within 2 business days of the utilization date. Copies of the following merger specific conditions subsequent typically need to be delivered to the lender(s):

(a) the application letter to register the Plan of Merger stamped by the Cayman Islands Registrar;

(b) a certified copy of the Plan of Merger;

(c) the certificate of merger;

(d) a certificate of good standing of the Target as the surviving company issued after the Effective Time;

(e) certified copies of the Target’s updated constitutional documents and statutory registers; and

(f) a Cayman Islands law legal opinion with respect to the effectiveness of the merger.

In the 1990s, many Chinese companies chose to list on NASDAQ or the NYSE to gain credibility and access to capital from US investors. In or around 2011 and 2012, this trend changed . While US listings remained attractive for Chinese companies, the cost of complying with reporting standards continued to increase. Additionally, a lack of comprehension by US investors of the corporate structures being utilized by these companies and of the underlying business environment in China led to lower market valuations for these Chinese companies.

This opened the door for arbitrage opportunities. A Chinese company which was listed on NASDAQ or the NYSE but which had a stock market value lower than its intrinsic value would be taken private and de-listed with help from private equity sponsors and either: (i) continue to be privately held and later sold to a strategic or a financial buyer, or (ii) re-listed on the Shanghai Stock Exchange, the Shenzhen Stock Exchange or the Hong Kong Stock Exchange for better pricing. A wave of merger take-private transactions followed and this trend has resurfaced throughout the Covid-19 pandemic.

Since 2010 , the Cayman Merger Law has offered a more streamlined and efficient offshore alternative to the onshore merger law regimes (e.g. in New York and Delaware). The popularity of the Cayman Islands for merger take-privates further increased in 2011 when the shareholder voting threshold for approving a merger was reduced to a special shareholder resolution requiring only two-thirds of the votes cast.

The Cayman Merger Law is attractive for both companies and investors due to the process being relatively straightforward and simpler than either a tender offer under section 88 of the Cayman Islands Companies Act or a court-approved scheme of arrangement under sections 86 or 87 of the Cayman Islands Companies Act. Cayman Islands merger take-privates are also well tried and tested in practice.

Despite tensions between the US and China, Chinese companies raised a total of US$17.55 billion in US IPOs by the end of the first quarter of 2021, which is more than four times the amount raised during the previous 12-month period . However, the tides are arguably turning and we foresee that a large number of Chinese companies that are currently listed on NASDAQ or the NYSE will be de-listed in the short to medium term for a variety of reasons.

Firstly, the Holding Foreign Companies Accountable Act (the “HFCA Act”) now requires companies that are listed in the US to declare whether they are owned or controlled by a foreign government. In addition, in response to the fraud perpetrated in connection with Luckin Coffee, which culminated in trading of the company’s shares being halted on 6 April 2020 and de-listing by NASDAQ on 29 June 2020, the HFCA Act also authorizes the de-listing of foreign companies from US stock exchanges if they fail to provide the US Public Company Accounting Oversight Board with access to auditing records covering a three consecutive year period. We anticipate that these requirements will prove unappealing to certain businesses.

Secondly, US-listed Chinese companies are facing enhanced levels of scrutiny from both US and Chinese regulators. For example, the US Securities and Exchange Commission is scrutinizing variable interest entities (“VIE”) and requiring enhanced disclosures to be provided to investors regarding the key risks of investing in VIE structures. This is in addition to the blacklisting of over 130 Chinese companies by the Trump and Biden administrations, as a result of which new investors are unable to purchase stocks in these entities on the US stock market. The Cyberspace Administration of China has also imposed additional conditions on Chinese businesses that want to list of overseas and the crackdown has wiped hundreds of billions of US dollars off the market capitalizations of certain listed companies, particularly in the education and technology sectors.

Thirdly, the prospect of listing in Hong Kong or China is understandably appealing to US-listed Chinese companies that wish to avoid blacklisting and onerous auditing regulations and achieve better valuation levels. For example, US-listed DQ, a leading player in the solar energy supply chain with significant operations in Xinjiang, recently listed its key operating subsidiary in Shanghai’s STAR Market at a valuation level 3 times higher than in the US. We predict that other companies are likely to follow this path given the trends which have been identified in this article.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong
www.loebsmith.com
Peter is recognized as a leading offshore lawyer in the Asian Legal Business Offshore Client Choice List 2021

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An SPC is a single legal entity, which can create an unlimited number of separate segregated portfolios. The assets and liabilities of a segregated portfolio benefit from a statutory “ring-fence” from the assets and liabilities of (i) any other segregated portfolios of the SPC and (ii) from the general assets and liabilities of the SPC, under section 216 of the Companies Act. Given the flexibility of the corporate structure, ability to prevent cross-liability issues between different segregated portfolios and to pursue a different investment strategy for each segregated portfolio, the SPC is a very popular Cayman Islands investment vehicle for multi-class and/or multi-strategy investment funds. Please see our Briefing Note Benefits of Segregated Portfolio Companies for investment purposes for further details.

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 which provided (i) investment management services to segregated portfolios of the Fund, (including SP1) and (ii) operated the sourcing and pre-financing of gold doré from mines in East and West Africa. The Investment Manager was placed into official liquidation on 26 June 2020.

The Fund on account of SP1 is indebted to the Investment Manager in the sum of approximately US$55,000 pursuant to a loan transferred by the Fund to SP1 on 6 May 2019 (“Debt”).

The joint official liquidators of the Investment Manager demanded payment of the Debt and issued a statutory demand on SP1 on 10 February 2021 in respect of the Debt, which was acknowledged but not paid by SP1. The Investment Manager sought a receivership order from the Grand Court in respect of SP1, on the basis of SP1’s insolvency.

The winding-up procedures set out in Part V of the Companies Act apply in respect of a “company”, therefore as a segregated portfolio does not have a separate legal personality to the SPC, the statutory modes of winding-up which are available to a company, cannot apply to a segregated portfolio on its own. However, receivership allows a specific segregated portfolio to be closed down without the overall SPC structure having to be wound-up.

Section 224 of the Companies Act sets out the grounds for the appointment of a receiver over a segregated portfolio of an SPC. The key 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 segregated portfolio if the Court is satisfied:

1. 1. “that the segregated portfolio assets attributable to a particular segregated portfolio of the company (when account is taken of the company’s general assets, unless there are no creditors in respect of that segregated portfolio entitled to have recourse to the company’s general assets) are or are likely to be insufficient to discharge the claims of creditors in respect of that segregated portfolio”; and
   2. the making of a receivership order would achieve the purposes of “the orderly closing down of the business of or attributable to the segregated portfolio” and “the distribution of the segregated portfolio assets attributable to the segregated portfolio to those entitled to have recourse thereto.”

b.  Section 224(2) of the Companies Act states that a receivership order may be made in respect of one or more segregated portfolios.

SP1 did not dispute the fact that the Debt is owed by SP1, the quantum of the Debt or that the sum of the Debt is above the statutory minimum for a statutory demand pursuant to section 93(a) of the Companies Act.

However, counsel for SP1 opposed the receivership application in respect of SP1, on a number of grounds, including that it had not been shown that SP1 “has or is likely to have insufficient assets to meet the claims of its creditors”. It was also argued that if SP1 is deemed to be “balance sheet solvent” in the long term, the Court may not make an order for the appointment of a receiver.

Counsel for the Investment Manager argued that the relevant test for insolvency must either be by reference to a “cash flow test” or “balance sheet test” and submitted to the Court that a cash flow test should be used.

1. Cash flow test: a company is deemed to be insolvent under the cash flow test if it cannot pay the debts that are due at present, or if on the balance of probabilities, it does not or will not have the resources to discharge those debts that will fall due in the reasonably near future.
2. Balance sheet test: a company is insolvent under 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 before the Court that there is no case in the Cayman Islands Court of a petitioner having to prove that an entity is balance sheet insolvent. Furthermore, it was argued that a balance sheet test would bring up evidentiary issues for a petitioner (i) as a creditor would not usually have access to the books and accounts of the applicable company (especially in respect of a Cayman Islands company, for which there is no legal requirement to make accounts publicly available) and (ii) the valuation of assets is not an easy matter, even if a creditor has access to the relevant information.

As the Debt was settled before the judgment in this case was delivered, the judgment only covered the jurisdictional aspects of the application for receivership of the Segregated Portfolio by the Investment Manager.

The Judge in the case, Justice Raj Parker, did not accept that the wording in section 224(1) of the Companies Act equates to a cash flow test of insolvency – in particular, it was noted that no language as to debt and timing of payment is included within this sub-section.

The Court ruled that on a plain reading of section 224 of the Companies Act:

1. the test as to whether the Court has jurisdiction to make a receivership order in respect of a segregated portfolio is whether the assets of a company are or are likely to be sufficient to discharge the claims of creditors, which can be regarded as its liabilities i.e. a balance sheet test, rather than a cash flow test; and
2. this involves a determination on the available evidence of whether the assets are sufficient at present or are likely to be in the reasonably near future when assessed against its liabilities (including prospective and contingent liabilities) and are held in a form where they may be used to pay the claims of creditors.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on Segregated Portfolio Companies, please contact your usual Loeb Smith attorney or:

Elizabeth Kenny
Senior Associate
Tel: +1 (345) 749 7594
E: elizabeth.kenny@loebsmith.com