Zhong Shan Strategic Fund v Rg Strategy Fund VCC

Facts

RG Strategy Fund VCC is an umbrella variable capital company (VCC) under the Variable Capital Companies Act 2018. One of its sub-funds, RG Asset-Backed Investment Fund I (ABIFI), had as its only remaining investment a subordinated loan exposure of HK$298m linked to the Man Sun Logistics Centre in Hong Kong, ranking behind a first charge held by UOB. Zhong Shan Strategic Fund (ZSSF), a Cayman Islands fund, held Class C shares representing 53.6% of ABIFI, having subscribed HK$67m and HK$142m in 2023. As industrial property values fell, the fund manager pursued an orderly realisation and used ABIFI's cash to cover shortfalls in interest due to UOB to prevent enforcement. ZSSF asked to redeem shares in November 2024, the board suspended NAV calculation and redemptions on 30 December 2024, and ZSSF then asked to redeem its entire holding in January 2025. UOB later agreed in principle to extend the loan to 15 August 2026.

In HC/CWU 227/2025, ZSSF applied to wind up ABIFI on the grounds that it was unable to pay its debts, relying on the unfulfilled redemption requests, and that winding up was just and equitable. After procedural defects in the title and the named defendant were cured by amendment, the court noted that, to its knowledge, there was no prior published decision on winding up a VCC sub-fund. ABIFI's other two shareholders opposed the application.

Issues

1. Whether ZSSF had standing as a creditor, contingent creditor or contributory to apply to wind up the sub-fund
2. Whether the VCC was unable to pay the sub-fund's debts
3. Whether it was just and equitable to wind up the sub-fund, and whether the court would in any event decline to do so

Holding

The High Court dismissed the application to wind up the sub-fund, finding that neither the insolvency ground nor the just and equitable ground was established, and directed the parties to file written submissions on costs, limited to five pages, unless costs were agreed.

Reasoning

On standing, the court held that under the fund's constitution and offering documents a redeeming shareholder becomes a creditor only from the Redemption Day. The board validly suspended redemptions before any Redemption Day arrived, in circumstances where redemption would have had a material adverse effect on shareholders, and there was no evidence its discretion was exercised arbitrarily, capriciously, perversely or in bad faith. Talk of redemption in kind was a proposed consensual restructuring, not an admission of debt. Because ZSSF, a sophisticated investor, did not exhibit or cite these provisions when it filed, the court drew the inference that it knew no debt was due and had in bad faith tried to suppress them. ZSSF was not a creditor, but it was a contingent creditor, since redemption must follow once the suspension ends, and it had standing as a contributory.

On insolvency, the court held that the cash flow test in Sun Electric Power Pte Ltd v RCMA Asia Pte Ltd [2021] 2 SLR 478 applies to sub-funds, looking at assets and liabilities attributable or allocated to the sub-fund. ABIFI had no present debts. Whether the redemption liability would crystallise within 12 months, and whether it could then be met, was too speculative, and the board could keep the suspension in place during an orderly realisation. Management fees were borne by the Class A shareholder, who had shown support by injecting further funds.

On the just and equitable ground, ABIFI's main object of generating returns from investments, including subordinated loans, had not been lost; the poor performance of one investment was a risk ZSSF had knowingly accepted. ZSSF had agreed to the board's power to suspend, even indefinitely, and winding up would release it from that bargain unfairly to other investors.

Had the grounds been made out, the court would still have refused an order: ZSSF's shifting case and suppression of documents showed an abuse of process, winding up would likely derail talks with UOB and add cost, and the other investors opposed it.

From the judgment