Jan 2026
In Biostar Pharma, Inc. v. LFM Oversea Investment Fund SPC and LFM Stable Income Fund SP [2025] CIGC (FSD) 118, the Grand Court of the Cayman Islands appointed receivers over LFM Stable Income Fund SP (the “SP”), the segregated portfolio of segregated portfolio company LFM Oversea Investment Fund SPC (the “SPC”), applying the flexible balance sheet test to determine insolvency. This decision builds on the guidance in Oakwise Value Fund SPC 2024 (1) CILR 525, affirming the court’s pragmatic approach to assessing solvency in the context of SPC structures.
Background
Biostar Pharma, Inc. (“Biostar”), a Hong Kong-listed company, invested US$5 million in the SP in November 2024 under a one-year term. A side letter granted Biostar the right to redeem its investment in tranches with one month’s notice. Following concerns about disclosure and compliance relating to the SP’s underlying assets, particularly relevant given Biostar’s listed status, Biostar exercised its redemption rights and later served a statutory demand for repayment of the US$5 million (the “Debt”).
The SPC acknowledged receipt of the redemption request but made no payment and raised no objection until after Biostar filed its petition. Acting on representations that redemption would occur if further funds were provided, Biostar’s subsidiary transferred an additional US$5 million. Instead of redeeming Biostar, the SP invested the entire US$10 million in notes issued by a BVI company (the “Issuer”).
Judgment
The court held that the SP failed to establish that its assets were or were likely to be sufficient to discharge creditor claims under section 224(1) of the Companies Act. In assessing solvency, the court applied the flexible balance sheet test endorsed in Oakwise, which considers actual, contingent, and prospective liabilities rather than a static balance sheet snapshot. This approach reflects the reality that SPCs typically hold financial instruments rather than engage in trading, making a simple balance sheet analysis insufficient.
Applying these principles, the court criticized the SP for limited financial disclosures and the late submission of audited accounts, noting difficulty in relying on such information. Biostar and its subsidiary each have claims of at least US$5 million, which are expected to crystallise by the time the notes mature in early 2026. The court was therefore satisfied that the segregated portfolio assets “are or are likely to be insufficient to discharge the claims of the creditors in respect of that segregated portfolio” under section 224(1)(a) of the Companies Act.
The court was also dissatisfied with the lack of evidence regarding the financial standing of the Issuer and, by extension, the notes issued by it. Redactions were made to the Issuer’s financial statements without explanation. The judge concluded that there was insufficient evidence regarding the Issuer’s financial status and its investments.
Key Takeaway
This judgment reinforces the application of the flexible balance sheet test established in Oakwise, providing clarity on the treatment of actual and contingent liabilities. The court emphasised the importance of reliable and timely financial disclosures and audited statements, which remain critical in determining solvency.
Conyers acted on behalf of the successful applicant companies in both Biostar and Oakwise, securing the appointment of receivers and joint provisional liquidators in both cases. These decisions highlight our market-leading expertise in complex fund disputes and insolvency proceedings involving SPC structures.