Segregated Portfolio Companies as Mutual Funds
The laws of each of the British Virgin Islands (BVI) and the Cayman Islands permit, within a single company, the segregation of assets and liabilities amongst various "portfolios" in a way which binds third parties as a matter of the respective laws.
Notwithstanding the segregation of assets and liabilities within portfolios, the Segregated Portfolio Company ("SPC") is a single legal entity and any segregated portfolio of, or within, an SPC does not constitute a legal entity separate from the SPC itself. This means, for example, that a portfolio cannot buy shares in another portfolio except through a third party.
Why choose an SPC?
The segregation of assets and liabilities between various separate "pools" is already possible by the adoption of a group company structure comprising a number of different companies. Furthermore, it has always been possible to segregate assets and liabilities within a company on a consensual basis relying on limited recourse language in relation to creditors, and asset allocation provisions in the memorandum and articles of association in relation to shareholders. So what are the benefits of adopting an SPC?
- Cost - there is only one set of registration and annual fees (though these are higher than for a non-SPC recognised or registered mutual fund - see below).
- Simplicity - it is only necessary to administer one corporate entity, rather than several.
- There is a significant diminution of potential conflicts of interest for directors in respect of separate portfolios in a way which would not be possible if those directors were directors of separate companies.
- The SPC regime, whilst using one corporate entity, binds non-consensual third parties as well as consensual third parties under the laws.
- The SPC regime treats each pool of assets and liabilities of an SPC effectively as a separate legal entity so that corporate rules which would otherwise be applied on an entity basis, are applied on a portfolio basis, for example, calculation of profits for dividend purposes.
Which companies can be an SPC?
- For BVI companies the provisions of Section 135 of the BCA do not apply to all companies in the British Virgin Islands, but only those companies limited by shares which apply to and received written approval from the Financial Services Commission (Commission) to be incorporated as a segregated portfolio company (SPC). An existing ordinary non-resident company may register with the Registrar as an SPC. The Commission will give its written approval to the incorporation of a company or the registration of an existing company as an SPC only if the company is, or on its incorporation will be, inter alia, recognised as a professional or private fund or registered as a public fund under the Securities Investment Business Act (SIBA).
- Cayman Island exempted companies are not subject to prior approval by the Cayman Islands Monetary Authority (CIMA) but must be registered principally from a fees perspective.
- An SPC must include in its name "SPC" or the words "Segregated Portfolio Company"; in addition, each segregated portfolio must include in its name the words "Segregated Portfolio".
What is an SPC?
- An SPC is permitted to create one or more segregated portfolios in order to segregate the assets and liabilities of the company held within or on behalf of a portfolio from the assets and liabilities of the company held within or on behalf of any other segregated portfolio of the company, or the assets and liabilities of the company which are not held within or on behalf of any segregated portfolio of the company (called the general assets of the company). The segregation of assets and liabilities within portfolios does not create any new legal entity: the SPC is and remains a single legal entity and any segregated portfolio of, or within, an SPC does not constitute a legal entity separate from the SPC itself.
- An SPC may create and issue shares in one or more classes (including different classes or series relating to the same segregated portfolio) the proceeds from the issue of which must be included in the same segregated portfolio as an asset of the segregated portfolio in respect of which the segregated portfolioshares are issued. An SPC may pay a dividend in respect of the segregated portfolio shares of any class or series whether or not a dividend is declared on any other class or series of segregated portfolio shares, or any other shares. The dividends paid on a segregated portfolio share must be paid by reference only to the accounts of the relevant segregated portfolio. In other words, a dividend may only be paid on segregated portfolio shares if the relevant segregated portfolio could lawfully pay that dividend if that portfolio were a separate company.
- Any act, matter, deed, agreement, contract, instrument under seal or other instrument or arrangement which is to be binding on or to benefit a segregated portfolio must be executed by or on behalf of the directors of the SPC and on behalf of the relevant segregated portfolio.
- All SPC's are required to produce financial statements which shall take into account and shall include an explanation of:
- The nature of the company;
- How the segregation of the assets and liabilities of the company impacts upon members of the company and persons with whom the company transacts; and
- The effect that any existing deficit in the assets of one or more segregated portfolios of the company has on the general assets of the company.
- All SPC's are required to produce a set of financial statements in respect of each of the segregated portfolios comprising the SPC.
Ongoing regulatory requirements
- All SPC's and their segregated portfolios are required to obtain the prior written approval of the Commission in BVI to any material change to any information provided to the Commission, whereas CIMA requires that material changes to the SPC be reflected by filing new MF1 forms detailing changes and where appropriate revised or supplemental offering documents. This applies not only to information supplied at the time of application but also on an ongoing basis.
The Directors' duties
- Unlike many other offshore jurisdictions including Cayman Islands, the directors of a BVI SPC do not incur personal liability for the liabilities of the SPC and the segregated portfolio.
- Among the duties of the directors of an SPC are the duty to establish and maintain procedures to segregate, and keep segregated, portfolio assets separate and separately identifiable from general assets; to segregate, and keep segregated portfolio assets of each segregated portfolio separate and separately identifiable from segregated portfolio assets of any other segregated portfolio; and to ensure that assets and liabilities are not transferred between segregated portfolios otherwise than at full value. The directors may engage an investment manager to collectively invest or manage the segregated portfolio assets or the general assets of the company and provided that the assets remain segregated and separately identifiable then the directors do not breach their duties.
Position on insolvency
- Segregated portfolio assets must only be used to meet liabilities due to the creditors of a particular segregated portfolio, and are not available or to be used to meet the claims of creditors of another separate segregated portfolio.
- It follows that a liability in respect of a particular segregated portfolio entitles a creditor of that segregated portfolio to have recourse only to the segregated portfolio assets attributable to such segregated portfolio, and not to the assets of other segregated portfolios. The respective laws also permit the liabilities of a particular segregated portfolio to be met by the general assets (unless specifically prohibited by the articles of association) of the SPC to the extent that the assets attributable to the segregated portfolio are insufficient to satisfy the liability and to the extent that the SPC's general assets exceed any minimum capital amounts lawfully required by a regulatory body in the Cayman Islands or the British Virgin Islands. Where the assets of more than one portfolio are insufficient to meet each respective portfolio's liabilities it is not clear on what basis the liabilities of such insolvent portfolios will share in the general assets.
- It also follows from the above, that where a liability arises or is imposed other than from a matter in respect of a particular segregated portfolio that liability may only be met from the SPC's general assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.