Hong Kong Court recognises assets segregation for cayman segregated portfolios company
In the case of Tjin Joen Joe, Andy Tsjoe Kong and another v Oakwise Value Fund SPC [2025] HKCFI 1281, the Plaintiffs as shareholders of a segregated portfolio sought to enforce a default judgment by way of garnishee proceedings against the Hong Kong assets of other segregated portfolios maintained by the Defendant, a Cayman Island-incorporated fund. DLA Piper Hong Kong represented the Defendant in its appeal and had the default judgment and the garnishee order set aside. The DLA Piper team was led by Kevin Chan (Partner), assisted by Cleo Chau (Senior Associate).
FACTUAL BACKGROUND
Redemption of Shares in a Segregated Portfolio
In 2019 and 2021, the Plaintiffs invested in the Enhanced Fixed Income SP (EFI SP), a segregated portfolio managed by the Defendant, a Cayman Islands-incorporated segregated portfolio company (SPC). The Plaintiffs subscribed to Class A and Class C shares in EFI SP through subscription agreements governed by Cayman Island law. In addition to EFI SP, the Defendant also maintains other segregated portfolios (Other SPs).
Generally speaking, an SPC is a single legal entity whose assets and liabilities can be allocated to different portfolios within the company. Where assets have been allocated to a particular portfolio, those assets are held as a separate fund which is not part of the general assets of the company itself. Such segregated portfolios are held exclusively for the benefit of the owners of those segregated portfolios and any counterparty to a transaction linked to those segregated portfolios. Only persons who have entered into transactions with a segregated portfolio, or who otherwise have become creditors of the segregated portfolio concerned, will have recourse to that segregated portfolio’s assets.
On or around 6 April 2022 and 27 April 2022, the Plaintiffs submitted redemption forms to redeem their Class A and Class C shares in EFI SP respectively.
As EFI SP experienced challenges in liquidity, the Defendant's directors suspended redemption and/or suspended the payments of redemption payments for EFI SP.
On 1 November 2022, the Plaintiffs commenced Hong Kong proceedings to claim for payment of the redemption proceeds for their Class A and Class C shares in EFI SP.
In Hong Kong, the Defendant maintained 35 bank accounts with Standard Chartered Bank (Hong Kong) Limited (Garnishee Bank), some of which are to hold the assets of EFI SP (EFI Bank Accounts), and the other bank accounts hold assets of Other SPs (Other SPs Bank Accounts). The bank accounts' names contain abbreviations of the segregated portfolio that the bank accounts are holding the assets of, for instance "OAKWISE VALUE FS – EFIS". The balance in the EFI Bank Accounts was insufficient to meet the sum claimed by the Plaintiffs while the balance of the Other SPs Bank Accounts could cover the Plaintiff's claims.
Procedural History
As the Defendant did not file a Notice of Intention to Defend before the prescribed deadline, the Plaintiffs obtained a default judgment against the Defendant for USD 3,316,894.78, along with interest and fixed costs on 16 January 2023 (Default Judgment).
On 13 February 2023, a Garnishee Order nisi was granted over the EFI Bank Accounts and the Other SPs Bank Accounts (Garnishee Order).
On 31 March 2023, the Defendant, represented by its former solicitors, applied for, inter alia, setting aside of the Default Judgment and the Garnishee order nisi.
The Garnishee Order was made absolute on 28 March 2024 after a contested hearing.
On 3 April 2024, the Defendant filed a Notice of Appeal for, inter alia, to set aside the Default Judgment and the Garnishee Order. On 18 April 2024, the Defendants filed an urgent application for an interim stay of the Garnishee Order and obtained a stay of execution of the Garnishee Order in respect of the Other SPs Bank Accounts on 16 May 2024.
ISSUES AND DECISION
The two main issues decided by the Court were whether the Default Judgment and the Garnishee Order absolute should be set aside. A crucial preliminary issue was whether there is segregation of assets between EFI SP and the Other SPs.
Segregation of Assets
The Defendant argued that the assets of each segregated portfolio were segregated as required by their constituent documents and the laws of the Cayman Islands.
The Defendant was able to produce evidence consisting of the EFI SP and Other SPs' audited financial statements, the updated Statement of Account from the Garnishee Bank, and the auditor's notes recording that the assets and liabilities of each segregated portfolio were separate.
The Defendant also adduced evidence from Caymans Islands law expert to prove that it is the duty of a director of an SPC to segregate the portfolio under the Cayman Islands Companies Act (CICA) and any breach of the aforesaid duty is an offence punishable by fines.
The Court was satisfied that there is segregation of assets between the segregated portfolios concerned. Accordingly, the Court ordered that the Default Judgment be set aside as it is arguable that the Plaintiffs should not be allowed to obtain judgment against the Defendant with regard to assets in the Other SPs.
Garnishee Order
A Garnishee Order absolute will be refused when it would be inequitable, and the question is whether there is any reasonable ground why the order should not be made.
As the Garnishee Order was obtained based on the Default Judgment, and that the Default Judgment was held to be set aside, the Garnishee Order naturally falls away.
Nonetheless, the Court also found that there is reasonable ground the Garnishee Order Absolute covering Other SPs Bank Accounts should not be made for the following reasons:
- The Plaintiffs fully understood and agreed through the subscription agreements that there would be ring-fencing of assets between the segregated portfolios and that they would have no recourse to the assets of other segregated portfolios;
- The Garnishee Order absolute allows the Plaintiffs access to the assets of the Other SPs, which is outside their contractual rights and detrimental to the holders of participating shares in the Other SPs, as it would take away assets they have a beneficial interest in; and
- The Garnishee Order absolute could jeopardize the directors of the Defendant by exposing them to the risk of breaching the CICA and committing an offence.
KEY TAKEAWAYS
Although the general law in Hong Kong allows creditors of a company to have recourse to all of its assets in Hong Kong, this case recognises the ring-fencing of assets of different segregated portfolios as segregation is enshrined in the constituent documents of the segregated portfolios, including the private placement memorandum, subscription agreement and articles of association of a segregated portfolio company. In addition to construing the relevant clauses in the constituent documents, their governing law which mandates segregation plays a role in the parties' objective intention.
The judgment is welcomed by segregated portfolio companies as investors need not worry about the assets of its segregated portfolio being paid to investors of another segregated portfolio ran by the same company. Investor confidence and the integrity of a segregated portfolio company structure is therefore maintained.
Investors of a segregated portfolio should not try their luck to get into assets of other segregated portfolios as the case reinforces ring-fencing of assets and liabilities of segregated portfolio. At the same time, fund houses with segregated portfolios should ensure measures are in place to segregate the assets of different portfolios in accordance with the law of its incorporation.
The full judgment of the case can be accessed here.
