Vol 11 (2014) - Issue 6

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The Cayman Islands Segregated Portfolio Company Turns Sixteen

May 2014 marks the sixteenth anniversary of the Cayman Islands segregated portfolio company ('SPC'). This article takes a look back at the SPC's first decade and a half and in particular at the principles which have emerged from the first reasoned decisions of the Cayman Courts concerning the treatment of insolvent SPCs. The cases have posed some interesting and novel questions for the Courts to resolve and the decisions have put flesh on the bones of the statutory provisions as regards the status, duties and powers of officeholders appointed in connection with SPCs. However there are still some important unanswered questions surrounding the practical aspects of receivership, the rights of shareholders of an SPC and the rationale for the differences in the liquidation v receivership regimes, and these are also explored.

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 (2013 Revision) (the 'Law') sets out the statutory provisions providing for the establishment and operation of SPCs and their treatment in insolvency. 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 should be that the insolvency of one portfolio would not contaminate the other portfolios of an SPC. As shall be seen below this principle has faced challenge, but has ultimately been upheld by the Cayman Courts.

ABC Company (SPC) v J & Co. Ltd
In 2012, in the matter of ABC Company (SPC) v J & Co. Ltd the Court of Appeal overturned a decision of the Grand Court not to strike out a petition to wind up ABC brought on just and equitable grounds. The SPC, essentially a multi-class fund, had suspended the calculation of Net Asset Value ('NAV') and the payment of redemptions in a number of its portfolios for a number of years; however its remaining portfolios (representing around two thirds of the SPC's NAV) were operating normally and accepting subscriptions and paying redemptions in the usual way. The investment manager was effectively winding down the suspended portfolios so as to make distributions over time before ultimately terminating them.