The Companies Act (2021 Revision) and Obelisk Global Fund SPC
| Jurisdiction | Cayman Islands |
| Judge | Raj Parker |
| Judgment Date | 12 August 2021 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | CAUSE NO. FSD 87 OF 2021 |
and
and
The Hon. Justice Raj Parker
CAUSE NO. FSD 87 OF 2021
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Segregated portfolio — insolvency-receivership order-s.224 Companies Act (2021 Revision)-meaning and effect—assets are or are likely to be insufficient to discharge the claims of creditors-balance sheet or cash flow test-discretion-identity of receivers.
Mr Paul Kennedy, Ms Katie Logan of Campbells on behalf of the Petitioner
Mr Michael Wingrave of Dentons on behalf of Obelisk Global Gold Focus Fund, Segregated Portfolio.
Mr Conal Keane and Mr Russell Smith on behalf of the JOLs
Obelisk Capital Management Limited (in official liquidation) (the “Petitioner”) is an exempted Cayman Islands investment management company incorporated on 12 June 2013.
By Order of the Grand Court dated 26 June 2020, the Petitioner was placed into official liquidation and Declan Magennis and Russell Smith were appointed as joint official liquidators (the “JOLs”).
In addition to providing investment management services to other entities, the Petitioner operated the sourcing and pre-financing of gold doré (“Doré”) from mines in both East and West Africa for transportation and delivery to gold refineries outside of Africa, typically using contracted agents and other intermediary parties. Doré refers to smelted precious metal bars generally composed primarily of 91% – 97% gold with additional silver and/or aggregates content that are generally created at the site of the mine. These bars are then typically transported to a refinery for market grade purification.
Obelisk Global Gold Focus Fund (the “Fund”) is one of at least two segregated portfolios of Obelisk Global Fund SPC (OG SPC), together with WE Affluence Gold Fund (WE AGF).
OG SPC was incorporated in the Cayman Islands on 12 June 2013 as a segregated portfolio company and holds a mutual fund license issued by the Cayman Islands Monetary Authority. As was the case with the Petitioner prior to its official liquidation, the directors of OG SPC are Mr. Sifton and Mr. Ho. The shareholders of OG SPC are Mr. Ho, Mr. Jones and Worldwin Investments Limited.
According to its website, OG SPC's business is to provide investment opportunities in a variety of markets and jurisdictions located throughout the world via its preferred shares developed through a segregated portfolio corporate structure. The Global SPC further states that it specialises in creating funds that offer low-risk, high-yield fixed returns, that are non-correlated to markets and interest rates.
The Fund is indebted to the Petitioner in the sum of at least US$55,000 pursuant to a loan transferred via OG SPC to the Fund on 6 May 2019, which was described in the relevant bank transfer documentation as a “loan to funds to pay dividends [sic]”.
On 1 December 2020 the JOLs demanded repayment of the loan forthwith. On 4 December 2020 the management of the Fund replied asking that a formal request be made to the directors of OG SPC and further stated that the loan would be ‘ added to the Q1 2021 cash flows’. On 10 February 2021 the Petitioner served a statutory demand on the Fund.
The Fund has acknowledged the debt and that it has not made any payment to the Petitioner despite the statutory demand 1.
The Petitioner seeks a receivership order on the basis of the Fund's insolvency. It submits through Mr Paul Kennedy that this is a classic case of a company seeking to raise ‘a cloud of objections’ in order to seek to stave off such an order in the face of an unpaid debt which is plainly due and owing. In these circumstances, the Court should make a receivership order on the Petition.
The Fund through Mr Michael Wingrave opposes the application on two main bases:
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a. It has not been shown that the Fund has or is likely to have insufficient assets to meet the claims of its creditors; and
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b. Even if the Court concludes otherwise, the Court should not exercise its jurisdiction to make the order sought.
Section 224 of the Companies Act (2021 Revision) sets out the grounds for the appointment of receivers over the segregated portfolio of a company by the Court:
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(1) Subject to subsections (2) to (5), if in relation to a segregated portfolio company, the Court is satisfied—
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(a) that the segregated portfolio assets attributable to a particular segregated portfolio of the company (when account is taken of the company's general assets, unless there are no creditors in respect of that segregated portfolio entitled to have recourse to the company's general assets) are or are likely to be insufficient to discharge the claims of creditors in respect of that segregated portfolio; and
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(b) that the making of an order under this section would achieve the purposes set out in subsection (3),
the Court may make a receivership order under this section in respect of that segregated portfolio .
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(2) A receivership order may be made in respect of one or more segregated portfolios.
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(3) A receivership order shall direct that the business and segregated portfolio assets of or attributable to a segregated portfolio shall be managed by a receiver specified in the order for the purposes of—
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(a) the orderly closing down of the business of or attributable to the segregated portfolio; and
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(b) the distribution of the segregated portfolio assets attributable to the segregated portfolio to those entitled to have recourse thereto.
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(4) A receivership order—
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(a) may not be made if the segregated portfolio company is in winding up; and
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(b) shall cease to be of effect upon commencement of the winding up of the segregated portfolio company, but without prejudice to prior acts of the receiver or his agents.
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(5) No resolution for the voluntary winding up of a segregated portfolio company of which any segregated portfolio is subject to a receivership order shall be effective without leave of the Court. (my emphasis).
The Court was referred to only one authority which considered the position of segregated portfolios 2 under this section. This case made it clear that proposed revisions recommended by the Law Reform Commission in April 2006 to conform the regime for the liquidation of segregated portfolios with other companies in the Cayman Islands were not accepted.
This was confirmed by Chadwick P:
“In those circumstances, the legislature must be taken to have decided not to give effect to the recommendation of the Law Reform Commission ……..that ‘a segregated portfolio should be liquidated in exactly the same way as if it was a company’ 3.
The particular case dealt with a petition to wind up on a just and equitable basis and did not directly deal with the question of whether a balance sheet or cash flow test ought to be applied. Mr Kennedy and Mr Wingrave agreed that the matter for the court principally involves an interpretation of section 224 itself.
Mr Kennedy put the issue before the court as follows: the Fund takes the position that the Petitioner's unsatisfied demand for repayment of a liquidated sum does not bring it within Section 224(1) (a), so the question at issue is how the test under that sub-section is to be satisfied by a petitioner. There does not appear to be any Cayman Islands case law which specifically interprets the sub-section.
The question whether the Fund has sufficient assets to meet the claim of its creditor is a question of solvency. As is well known, the insolvency of a company in the Cayman Islands is governed by Section 93 of the Companies Law which provides that a company will be deemed unable to pay its debts when, inter alia, it has failed to meet a demand served on it for a sum exceeding CI$100 or it is proved to the satisfaction of the Court that it is unable to pay its debts: sections 93(a) and (c). In the first case the court decides the issue on the basis of a statutory presumption which the company has the burden of rebutting. The test under section 93(c) of the Companies Law is one of commercial or ‘cash flow’ insolvency: Re Weavering Macro Fixed Income Fund Limited [ 2016 (2) CILR 514] at [40] per Martin JA. The Fund is clearly not solvent on a cash flow basis.
The relevant legal principles for challenging the presentation of a winding up petition on the ground of insolvency in respect of a company are also well-established:
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(1) The fundamental question is whether the petition debt is bona fide disputed on substantial grounds: Camulos Partners Offshore Limited v Kathrein [ 2010 (1) CILR 303] per Chadwick JA at [58]–[61].
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(2) The burden lies on the Company to show that the petition debt is bona fide disputed on substantial grounds: Allied Leasing & Fin Corporation v Banco Economico SA [2000] CILR 118 at p.129.
In this case the Fund does not dispute that a sum is owed above the statutory minimum, the quantum of the debt, or the fact that it is due and payable.
The Fund's opposition to the Petition is set out a paragraph 32 of Jones 1....
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