It has long been recognized under Cayman Islands law that individual portfolios of Segregated Portfolio Companies (‘SPCs’) occupy an anomalous position in the spectrum of corporate entities. Naturally, therefore, the liquidation process for individual portfolios is equally anomalous.

As long ago as 2006, the Law Reform Commission of the Cayman Islands recommended that the parts of the Companies Act, as amended, (the ‘Act’) that deal with the insolvency and liquidation of portfolios should be repealed and replaced. The object of the proposed amendments to the Act was to bring the means by which an individual portfolio would be liquidated into line with other forms of corporate entity. Those recommendations were, however, not taken up. In the case of ABC Company SPC v J & Company Limited [2012 (1) CILR 300], the Court of Appeal recognized that the failure to take up those recommendations must be interpreted to mean that the legislature had decided that a portfolio should not be liquidated in the same way as if it were a company.

The above notwithstanding, it was not until the case of Re: Obelisk Global Fund SPC and Obelisk Global Gold Focus Fund (unreported) FSD 87 of 2021 (RPJ) (‘Obelisk’), that there had been any serious judicial consideration of the test for insolvency applicable to portfolios under section 224 of the Act and/or whether or not any form of presumption concerning solvency existed based upon an unpaid statutory demand.

While resolving the issue of the applicable test for insolvency, at a basic level, the Court’s approach in Obelisk to the question of insolvency is likely to give rise to considerable uncertainty about how the test should be applied. Furthermore, the knock-on effect of the decision will have real implications for the way in which practitioners approach the preparation of receivership applications and the evidence required to successfully mount such applications.

The Petition in Obelisk was based upon an unsatisfied statutory demand presented by a related company group creditor against a particular portfolio of an SPC, namely the Obelisk Global Gold Focus Fund (the ‘Fund’). The Fund was not able to meet the debt owed from liquid assets prior to the hearing of the creditor’s Petition for the appointment of a receiver. However, the Fund possessed substantial illiquid assets the value of which exceeded the debt sought under the Petition. 

The Fund argued that the provisions of s. 224 gave rise to a balance-sheet test for insolvency, rather than a cash-flow test, as derived under sections 92 and 93 of the Act and applicable to other forms of entity. The creditor took the opposite position. The matter fell to be decided on the basis of statutory interpretation, but the creditor also added that the imposition of a balance-sheet test would cause creditors of portfolios in general terms substantial evidential difficulties, essentially appealing to public policy.

While accepting that the imposition of a balance-sheet test for insolvency might set a different bar for creditors to clear than they would have to clear against other corporate entities, the Court found that s.224 plainly provided for a test ‘… more akin to a traditional balance sheet test…’. The Court also confirmed that there are no deeming provisions applicable to applications under s. 224, such as those contained in sections 92 and 93 together, that would give rise to any form of presumption of insolvency as a result of failure to satisfy a statutory demand.

The Court then moved on to consider the sufficiency or likely sufficiency of the assets of the Fund to satisfy the claims of creditors. Here, the Court suggested that the starting point is whether ‘… assets, presently realizable or liquid, are insufficient to discharge the claim.’ The importation of ‘presently realizable or liquid’ into the balance sheet approach appears to drag the focus of the exercise back towards the cash-flow approach. That approach is arguably be out of step with the more nuanced approach adopted by the UK Supreme Court in BNY Corporate Trustee Services Ltd & Ors v Neuberger Berman Europe Group Ltd & Ors [2013] 1 WLR 1408, which was cited before the Court.

The precise formulation and application of the balance sheet test would appear to be fertile ground for argument in future cases. It remains to be seen whether Judges in later cases will adopt the hybrid, ‘presently realizable or liquid assets’ approach to the test taken by the Court in Obelisk or whether a more traditional balance sheet approach will be applied.

The practical effect of the Obelisk decision is that creditors seeking to appoint a receiver over an SPC portfolio must now prepare to meet a balance-sheet test for insolvency, with all attendant extra evidential challenges, albeit that the test is likely to the subject of some refinement in judgments to come. Furthermore, given the Court’s recognition of the absence of deeming provisions where portfolios are concerned, it is unlikely to be safe, without more, to rely upon an unsatisfied statutory demand as evidence of insolvency. Practitioners will consequently have to give thought to alternative and additional means of securing admissible evidence as to the assets and liabilities of a target portfolio.