The statutory test for appointing receivers over a segregated portfolio (‘SP’) under part XIV of the Companies Act (2022 Revision) was recently considered by Kawaley J in the Cayman Islands Grand Court in the matter of Green Asia Restructure Fund SPC.[1] While the judgment provides further clarity regarding the relatively untested jurisdiction for creditors to appoint receivers to wind up a SP, and builds upon the judicial guidance provided last year in Re Obelisk Global Fund SPC,[2] uncertainty still lingers.
The decision in Green Asia
The Petitioner, Applied Investment (Asia) Limited, was the sole shareholder in each of the two SPs within Green Asia Restructure Fund SPC. After presenting redemption notices in relation to a portion of its shareholding in each SP, the SPs each failed to make payment of the redemption proceeds, or furnish the Petitioner with requested accounts. The Petitioner accordingly applied to appoint receivers over the SPs, invoking the jurisdiction under s.224(1) of the Companies Act.
Section 224(1) provides that the Court may make a receivership order in respect of an SP where it is satisfied that:
- the assets attributable to the SP “are or are likely to be insufficient to discharge the claims of creditors in respect of that portfolio”, and
- the making of a receivership order “would achieve the purposes set out in s.224(3)”, namely to facilitate (i) the orderly closing down of the business of or attributable to the SP and (ii) the distribution of the SP’s assets to those entitled to same.
The petition was not opposed by Green Asia SPC. Without access to the SPs’ current financial statements, the petition necessarily relied upon the failure by each SP to pay the redemption proceeds on the redemption date (or in the months thereafter) to satisfy the insolvency test.
The decision of Parker J in Re Obelisk in 2021 was the first to consider the solvency test under s.224(1)(a). Kawaley J, adopting the findings of Parker J, agreed that the insolvency requirement under the first limb of the test is a balance sheet test, as opposed to a cash flow test. Kawaley J recognised at [12] of his judgment that “the proper construction of the relevant statutory provisions justifies the view that a somewhat fluid balance sheet solvency test applies under section 224(1) of the Act, for the purposes of establishing a prima facie case at least.”
When discussing the evidential standard to which a petitioner must satisfy the balance sheet test, and having regard to the specific language of the section (‘…are or are likely to be insufficient…’), Kawaley J held at [14] that “a creditor must therefore be entitled to prove either that (a) it is probable that a deficiency exists … or that (b) the evidence establishes a risk of deficiency so cogent and real that a receiver should prima facie be appointed in any event.” A flexible standard was recognised as being practically desirable in view of the fact that creditors will rarely have access to the requisite financial information necessary to positively prove, on the balance of probabilities, that there is a deficiency of assets.
Kawaley J further justified the imposition of a more flexible balance sheet solvency test on the basis that (i) the appointment of a receiver over a SP is a less drastic remedy than a winding up order in relation to a company and, (ii) even where the solvency test is failed, a creditor of an insolvent SP with an undisputed debt has no entitlement to a receivership order as of right, and must still satisfy the Court as to the second limb of the test under s.224(1)(b).
Considering the second limb of the test, Kawaley J commented at [20] that in the vast majority of cases a petitioning creditor would also need to establish that a receivership order would be “(a) consistent with the express or implied wishes of the majority of creditors and/or (b) there is no room for serious doubt that the segregated portfolio is hopelessly insolvent.” While these comments appear to be obiter, it is not clear whether Kawaley J considered these factors in his decision.
Kawaley J inferred from the failure of the SPC to respond to the application to appoint receivers that the SP was balance sheet insolvent. Further, he held that the Petitioner was also the sole shareholder of each SP, and more likely than not to have been the sole or by far the most commercially substantial creditor. The receivership order was granted accordingly.
Analysis
The significance of the judgment is in Kawaley J’s emphasis of the flexible standard a creditor must meet to demonstrate balance sheet insolvency. When read together with Re Obelisk, it appears that the Grand Court will be willing to grant receivership orders based upon a prima case of balance sheet insolvency, however the two authorities are not entirely in harmony. For example, in interpreting the words “are or are likely to be insufficient” in Re Obelisk, Parker J regarded the flexible balance sheet test as being satisfied based either on a present deficiency of assets, or a likely deficiency “in the reasonably near future”. While Kawaley J appeared to adopt this same test when quoting the relevant passages from Re Obelisk in his judgment, the test framed by Kawaley J does not necessarily encompass the temporal alternative noted by Parker J, namely a scenario in which a creditor is only able to prove a likely deficiency of assets in the reasonably near future (distinct from proving a likely deficiency which already exists).
The degree of flexibility which the Courts will accept may only become clear when the Court is tasked with weighing competing evidence introduced by a SPC seeking to resist a receivership order based on its solvency.
As for the second limb of the test, the additional requirements noted by Kawaley J at [20] are difficult to reconcile with the balance of his judgment, his adoption of Parker J’s analysis in Re Obelisk, and with the clear wording of the statute. There is no statutory requirement that a majority of creditors must expressly or impliedly consent to the receivership order, although their views will of course be considered under s.244(1)(b) and s.224(3). There will conceivably be cases where creditors in a SP (perhaps holding comparable commercial interests) will have differing views on whether to appoint a receiver or not, and minority creditors should not be left without a remedy in such circumstances. It is for the Court, not the largest creditor, to decide whether the purposes of s.224(3) will be achieved by making a receivership order.
Further, the comment from Kawaley J that a receivership order will be unlikely unless there is “no room for serious doubt that the segregated portfolio is hopelessly insolvent” appears to conflict with the solvency test set down earlier in his judgment, and would put the relief beyond the reach of many creditors. If the obiter comments were actually intended to form part of the test under s.224(1), which is not clear from the judgment, it appears that a higher threshold would be set for the appointment of receivers over a SP than exists for winding up a company. Given the nature of SPs and SPCs, this cannot have been the legislative intent, and also does not appear from a review of the judgment as a whole to have been Kawaley J’s intention either.
Campbells LLP appeared for the petitioners in Green Asia and Re Obelisk.
[1] (Unreported, 3 August 2022, FSD 112 and 113 of 2022 (IKJ))
[2] (Unreported, 12 August 2021, FSD 87 of 2021 (RPJ))