Why segregated portfolio companies are thriving in Cayman? Loeb Smith’s corporate Partner Gary Smith talks to HFM Week about SPCs.
HFMWeek (HFM):How versatile are SPCs? What makes them this way?
A Cayman Islands company can be dissolved by the appointment of a liquidator or it can be dissolved without such appointment if the company is struck off the register as a result of an application to the Registrar of Companies for the purpose.
Voluntary liquidation
In circumstances where the company has been active and has substantial assets and liabilities, it is normal and recommended for the company to be liquidated.
In a recent judgment,[1] the Cayman Islands Court of Appeal (the “Court”) has upheld the decision of the Grand Court which found that investors who have redeemed their shares but remain unpaid at the commencement of a company’s liquidation are entitled to prove in the liquidation for their redemption proceeds as a creditor. This is the case irrespective of whether or not the company could lawfully have distributed the redemption proceeds to them prior to the commencement of the liquidation.
When Cayman Islands funds undergo liquidity stress on their balance sheet due to holding illiquid assets or irregular large redemption requests, directors of Cayman Islands funds generally consider mechanics to provide for an orderly restructure to meet redemption requests which arise. Common arrangements are to implement a “redemption gate” which limits redemptions to a certain percentage of shares in the fund or a stronger response such as a suspension of all redemptions.
A recent decision of the Grand Court, Primeo Fund (in official liquidation) v Herald Fund SPC (in official liquidation)1, is another win for investor certainty in the Cayman Islands. In previous updates, we have written about Cayman Islands and BVI decisions which illustrate the various challenges associated with bringing clawback actions in the Cayman Islands against innocent arm's length mutual fund investors who have validly redeemed their shares.2 That message has been further reinforced, on different grounds, by Jones J in P
In certain circumstances the official liquidator of a Cayman company may be able to take action to recover assets which have been transferred in the run up to the company’s insolvency. It is important for those concerned with the affairs of a Cayman company in the twilight of insolvency to be aware of the statutory powers available to the official liquidator and the Grand Court in the Cayman Islands.
Voidable preferences
As we approach the end of 2015, now is the time to start planning the liquidation of Cayman Islands entities that have reached the end of their life cycle to ensure that unnecessary 2016 fees are not incurred.
The U.S. Bankruptcy Court for the District of New Jersey recently held that a Cayman Islands collateralized-debt obligation issuer (“CDO”) could be a debtor under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) and declined to dismiss an involuntary case commenced against the CDO by certain noteholders on the grounds that the notes held by such noteholders were “non-recourse” notes. Below is a discussion of the court’s decision and its potential implications. The decision is currently being appealed.
WHAT IS FATCA?
Over the past two or three years, we have seen an increasing number of cases where a client holds and wishes to sell or transfer shares in a Cayman Islands company which is in liquidation, or is seeking to purchase shares in such a company from another party. In those circumstances, the transfer of the shares would be void absent the validation of the Grand Court of the Cayman Islands, as a result of section 99 of the Companies Law (2013 Revision) ("Section 99"). Section 99 is in the following terms: