Vol 9 (2012) - Issue 6

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Cayman Islands’ Court of Appeal Re-affirms Status of Segregated Portfolio Companies

The Cayman Islands Court of Appeal has re-affirmed the distinction between segregated portfolio companies ('SPCs') and their segregated portfolios and the insolvency implications for each. In ABC Company (SPC) v J & Co. Ltd the Court held that the insolvency of one segregated portfolio in an SPC will not impact the other segregated portfolios in that SPC so as to require a winding up order to be made over the SPC as a whole.
The Court of Appeal's decision is believed to be the first reasoned judgment of the Cayman Islands courts dealing with the winding up of SPCs.

Case background
The facts in the ABC case, were that ABC Company (SPC) (the 'Company') was incorporated as an open ended investment fund. The offering memorandum dated 21 December 2010 stated that the general investment objective of the Company was to 'provide investors with an opportunity to benefit from capital growth and income opportunities in the world's equity, bond, property and currency markets'. The offering memorandum listed 82 segregated portfolios of the Company as at 21 December 2010 and indicated that a further 16 segregated portfolios were to be launched on 1 January 2011. All of the segregated portfolios were established to operate as open ended investment funds.
J & Co. Ltd (the 'Petitioner') held participating redeemable preference shares issued in respect of one of the Company's segregated portfolios which invested exclusively in real estate in Germany (the 'German Fund'). On 26 February 2008, investors in the German Fund were advised that a decision had been taken to suspend temporarily the calculation of the Net Asset Value ('NAV') of the German Fund. The effect was to suspend all subscriptions and redemptions of shares issued in respect of the German Fund. Between February 2008 and 24 June 2011 the NAV of the German Fund was not calculated or published; and no subscriptions or redemptions in respect of the German Fund were permitted. During the period of suspension the directors of the Company apparently continued to pay management fees to the fund manager.
On or about 12 April 2010, the directors of the Company proposed changes to the articles of association and offering memorandum. The changes were stated to be necessary as they would:
'… allow the Directors to instruct the Fund Administrator to calculate and publish the NAV on a monthly basis, (the NAV is the total of the Fund's assets less the total of the Fund's liabilities) without automatically recommencing the subscription/redemption cycle for each of the sub-Funds. This will restore full transparency on values for Shareholders and may facilitate the creation of a secondary market in the Sub-Fund's shares. The changes would also allow the Directors to set redemption gates, allowing the orderly management of redemptions from the Fund once the suspension on redemptions is lifted.'
The proposed changes were approved by special resolutions passed at shareholder meetings (at over 60 class meetings) of each segregated portfolio.
The Petitioner through its US counsel wrote to the directors of the Company and the fund manager raising a number of issues regarding the management and status of the German Fund. In response to that letter the fund manager provided the Petitioner (through its US counsel) with a document described as a 'Fund Update' in which it was stated (i) that the assets of the German Fund were to be liquidated over the following three years and pro-rata distributions of capital were to be made to shareholders as liquidity allowed (a process described as the 'Liquidation'); (ii) that NAV calculation would recommence in February 2011, but redemptions of shares would remain suspended for the duration of the Liquidation (estimated to be until 2013); (iii) that the German Fund would continue to issue to investors half-yearly valuations and yearly audited financial statements; and (iv) that the investors would receive 'quarterly notes about the progress of the Fund'.