The Cayman Islands segregated portfolio company (SPC) provides asset and liability ring-fenced, separate, segregated portfolios. It is a much used vehicle for multi-class investment funds, structured finance, captive insurance - and as a convenient alternative to group subsidiary companies.

A segregated portfolio, unlike the SPC itself, does not constitute a legal entity and accordingly, is not subject to the company winding up process separately from the SPC. However, the Companies Act provides a broadly equivalent separate regime in the court appointment of a receiver over a segregated portfolio, whose task is to manage the orderly closing down of the business of the portfolio and the distribution of its assets to those entitled to them. S.224 of Part XIV of the Act provides for the appointment of a receiver of a segregated portfolio on the application of, amongst others, a creditor, a shareholder or the company itself, where the assets of the portfolio are or are likely to be insufficient to discharge the claims of creditors in respect of that portfolio. Unlike winding up, no other ground is provided for the appointment of a receiver.

In Re Obelisk Global Fund SPC, Justice Parker considered whether s.224 imposed a cash flow or a balance sheet insolvency test. It was argued that, although the assets of the relevant portfolio were currently insufficient to discharge the debt of the applicant creditor, the effect of s.224 was that, if the portfolio is deemed to be balance sheet solvent in the long term, the court had no jurisdiction to appoint a receiver over the portfolio.

Justice Parker rejected the contention that s.224 equated to a cash flow test of insolvency. It was further held that the test required more than a simple assessment of the relative values of the two sides of a balance sheet. It involved a determination of whether the assets of the portfolio are, or are likely to be in the reasonably near future, (when assessed against its liabilities, including prospective and contingent liabilities), held in a form where they may be used to discharge the claims of its creditors.

Difficulties in the precise valuation of assets may not be a particularly high hurdle when creditors’ claims for relatively modest amounts are accepted and are not discharged. The starting point in such a situation is that the applicant may legitimately say that the presently realisable or liquid assets are insufficient to discharge the claim. As it was accepted in this case that the assets of the relevant portfolio were insufficient, at that time, to discharge the debt of the applicant creditor, the court clearly had jurisdiction to order the appointment of a receiver. In the event, the debt was paid before judgment was delivered, and the judgment accordingly concerns jurisdiction alone.

The decision is a welcome clarification of the protection available by receivership of a segregated portfolio of a Cayman Islands SPC.