Green Asia Restructure Fund SPC - The challenge of insolvent portfolio companies
In the recent decision in Re Green Asia Restructure Fund SPC, the Grand Court of the Cayman Islands considered an application by a creditor for the appointment of receivers to the portfolios of a Segregated Portfolio Company (more commonly referred to as an SPC) on the grounds of their insolvency. The decision highlights some of the practical difficulties that creditors of a portfolio of an SPC face when seeking to have the portfolio wound up.
An SPC is a type of company that allows for the company’s shareholders, assets, creditors and liabilities to be segregated into individual portfolios. These individual portfolios function practically as entities separate from the other portfolios and the SPC itself, although they do not have their own legal personality.
The statutory remedy available to an unpaid creditor of an insolvent portfolio is to apply for the appointment of receivers to the portfolio for the statutory mandated purposes of closing down the portfolio and distributing the portfolio’s assets among its creditors. The decision in Re Green Asia Restructure Fund highlights the practical difficulties that a creditor faces when making such an application. A creditor of an ordinary company must demonstrate the company’s insolvency on a cash flow basis in order to obtain a winding up order, and can employ the statutory demand regime to give rise to a presumption of the company’s cash flow insolvency. However, a creditor of a portfolio of an SPC must demonstrate the portfolio’s insolvency on a balance sheet basis, and without the benefit of any statutory mechanism that might give rise to a presumption of the portfolio’s insolvency. A creditor who sits outside of the SPC will rarely have sufficient knowledge of the portfolio’s financial position in order to demonstrate insolvency on a balance sheet test. While the Court has read some flexibility into this statutory balance sheet test, such that a creditor is entitled to prove either that (1) it is probable that a balance sheet deficiency exists or (2) there is a cogent and real risk of deficiency, this remains a difficult hurdle for an outside creditor to overcome.
The creditor’s application in Re Green Asia Restructure Fund was successful. While the Court did not have the benefit of considering the balance sheet of the relevant portfolios, it was prepared to infer insolvency in the unique circumstances of that case. Notably, the applicant creditor was also the sole shareholder of the relevant portfolios, and was in a better position than an outside creditor to lead evidence as to the portfolio’s financial position.
