An Introduction to Segregated Portfolio Companies
An Introduction to Segregated Portfolio CompaniesPublished July 1, 2005 - British Virgin Islands
The introduction of the BVI Business Companies Act 2004 (the “Act”) has expanded the uses of segregated portfolio companies (“SPC”) in the British Virgin Islands (“BVI”).
Prior to the Act, the law regarding segregated portfolio companies was contained in the Insurance Act 1994 (as amended by the Insurance (Amendment) Act 2002) and only insurance companies were able to register as a SPC. The Act now allows insurance companies and mutual funds to incorporate as a SPC. There are also provisions in the Act for the passing of Regulations which may allow companies of another class or description to be incorporated or registered as a SPC.
What is a Segregated Portfolio Company?
A SPC is a company that may create one or more segregated portfolios. A segregated portfolio is a portfolio containing assets and liabilities that are legally separated from the assets and liabilities of the company’s ordinary account, usually referred to as the “general account” and from other segregated portfolios within the company.
Development of the Segregated Portfolio Concept
The concept of statutory segregation of portfolios is well developed and recognised in other jurisdictions including Bermuda, Cayman Islands and Guernsey. The ability to create a segregated portfolio company has been part of BVI Law for 3 years but only to available to insurance companies. The Act not only extends the provisions relating to segregated portfolios to mutual funds but also leaves scope for further development and it is hoped that Regulations will soon be passed extending the use of segregated portfolio companies into areas such as capital markets and securitisation transactions.
In addition to new companies registering as an SPC, existing companies are also able to convert to SPC status. In order to convert to SPC status, the company must first obtain the written approval of the Financial Services Commission (‘FSC”).
The Nature of Segregated Portfolio Companies
The Act affirms that a segregated portfolio company is a single legal entity and a segregated portfolio does not constitute a separate legal entity.
Each segregated portfolio needs to be separately identified or designated and is required to include in such identification or designation the words “Segregated Portfolio”.
The fact that the segregation seeks to address creditor claims rather than fully splitting the single legal personality of the SPC means that there will be situations where an SPC is not a satisfactory substitute for a parent/subsidiary or other structure.
Rights and Obligations with Respect to Segregated Portfolios
The Act requires that assets linked to a segregated portfolio must be held by the company as a separate fund which does not comprise an asset of the general account. The fund is to be held for the benefit of portfolio owners and counterparties and is available to meet the claims of portfolio owners and creditors of the segregated portfolio. It is not available to meet the company’s obligations to general shareholders or those creditors whose claims are not linked to the same segregated portfolio.
Creditor Enforcement Rights
Special provisions are included in the Act to reduce the likelihood that creditors in respect of a particular segregated portfolio will be in a position to enforce their claims against assets not linked to that portfolio. The Act implies a provision into every contract by which the parties agree that the liability will not be paid out of assets other than assets of the portfolio to which the transaction is linked. If any party succeeds in making liable any segregated portfolio assets that are not attributable to that segregated portfolio, that party shall be liable to the company to pay a sum equal to the value of the benefit obtained by him. It also provides that any recoveries in breach of the provision are held on trust by the recipient for the company.
Range of Application of Segregated Portfolio Company Uses
The Act represents a major opportunity for many international businesses. The principal advantages of the new provisions and the uses of SPC are considered below.
A company that is or on its incorporation will be licensed as an insurer under the Insurance Act 1994 may be incorporated as an SPC.
In relation to insurers, a segregated portfolio insurance company is typically a variation of a “rent-a-captive”. A rent-a-captive structure which does not offer legal segregation of accounts, participants agree among themselves to keep the gains and losses of each program separate from the others. These internal agreements would not generally be effective against third parties such as creditors of the rent-a-captive in the event of liquidation. By taking advantage of the BVI legislation, a segregated portfolio rent-a-captive, each participant’s program is legally segregated from the other, thus making the separation between participants in the rent-a-captive unassailable in the event of liquidation. The segregated portfolio rent-a-captive, offers “fire walls” between program participants which should withstand the claims of third party creditors of another participant. Participants need not be concerned that the underwriting losses of an imprudent participant may bring the whole facility down.
Legal segregation of accounts also has application in the insurance industry outside of the group captive context. Insurers underwriting long-term risks, such as life, disability, pension plan or annuity programs can take advantage of the legal segregation of reserves among different programs and products.
2. Mutual Funds
A company that is, or on its incorporation will be, recognised as a professional or private fund or registered as a public fund under the Mutual Funds Act 1996 may be incorporated as a SPC.
In the field of investment funds, segregated portfolio companies are having a significant effect on enhancing the versatility and efficiency of fund structures. Traditionally the need to have structures whereby investors could access different trading strategies through a single vehicle led to the development of ‘multi class’ and ‘umbrella’ funds. In the former there is typically a single entity offering various classes of shares designated according to, say, the intended end investment.
In the event of winding up of a multi-class fund, the segregation breaks down with distributions being made in the liquidation to creditors generally and there is also the possibility of a creditor attaching an asset without regard to its attribution to a particular class in the fund. To address the problem of such “cross-class liability”, umbrella funds were set up by establishing entirely separate subsidiaries to support each sub-fund, which may be held by a central or holding vehicle.
The segregated portfolio company legislation provides an attractive alternative to these measures and gives the SPC, through a single legal entity, the ability to operate in a way analogous to a corporate group comprising parent and subsidiaries.
Although not yet clear what will be contained in the Regulations it is hoped that they will facilitate the SPC legislation to be used for the following types of transactions:
3. Capital Markets and Securitisation Transactions
In capital markets and securitisation transactions the ability to limit recourse of a creditor holding a particular class or series of the company’s debt securities to specific underlying assets in such an efficient way is attractive.
4. Companies Owning Real Estate, Ships, Aircraft or Other Assets
Currently it is conventional for ship owning businesses or airlines to organise themselves using a corporate structure. The simplest structure entails a holding company owning a separate company for each ship or aircraft in the fleet. Much more complicated structures are also often used.
A SPC would accomplish the same objectives much more efficiently and economically, whereby each such asset would be owned by a separate segregated portfolio.
Why set-up in the British Virgin Islands?
The BVI has built up a reputation of being a professional, well-regulated and cost-effective jurisdiction. Firms with multi-jurisdictional capability such as Appleby Spurling Hunter, that have a strong presence in Bermuda and Cayman, are able to draw upon that experience and provide the same level of service and expertise to their clients in the BVI as the other jurisdictions in which they practice.
Much interest has been expressed by potential users in relation to the new legislation and it is anticipated that many companies presently operating without the benefit of segregated portfolio legislation, will become registered under the Act.
John Greenwood is Managing Director of Appleby Corporate Services (BVI) Ltd and a legal consultant with Appleby Spurling Hunter in the British Virgin Islands. If you have any questions or require any further details in relation to setting up a segregated portfolio company in the BVI, contact him on 284-494-4742 or via email at email@example.com