Cayman Islands: Segregated Portfolio Companies

A recent amendment to Cayman Islands company law extending the provisions relating to segregated portfolio companies provides an attractive alternative corporate structure with far reaching applications.

The ability to create a segregated portfolio company (SPC) has been part of the Cayman Islands Companies Law for some four years. Previously, these provisions were restricted to apply only to certain insurance companies. The new amendment extends the provisions relating to segregated portfolios to any exempted company. In essence, the new law provides that, whilst retaining its corporate existence as a single legal entity, a company may be registered as having segregated portfolios of assets, which may be traded independently and which during the life of the company and on liquidation are isolated in respect of creditor claims from liabilities of other segregated portfolios and from the general liabilities of the company.

In the field of investment funds, the new provisions are expected to have a significant effect in enhancing the versatility and efficiency of fund structures. Traditionally the need to have structures whereby investors could access different trading strategies or investments, different markets or different managers through a single vehicle led to the development of ‘multi class’ and ‘umbrella’ funds. In the former there is typically a single legal 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 whereby entirely separate subsidiaries were created to support each sub-fund, which may be held by a central or holding vehicle.

The new 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. The SPC will create segregated portfolios, segregating its assets and liabilities and although each segregated portfolio must be separately identified it will not be a separate legal entity from the company.

The appeal of the SPC will extend well beyond investment funds. In capital markets and securitisation transactions the ability to limit the recourse of a creditor holding a particular class of the company’s debt securities to specific underlying assets in such an efficient way will be attractive. In joint ventures a simple and secure segregation of certain assets to shares held by a particular party may be useful. In the case of asset holding companies (e.g. those owning ships and aircraft) the use of an SPC will allow increased possibilities to consolidate multiple assets under the ownership of a single company where previously ownership was arranged on the basis of one asset per company. In more general terms the ability effectively to ‘ring fence’ certain assets and their related liabilities is bound to increase and often simplify the options available in structuring loan or equity financings.

The fact that the segregation is effective in terms of creditor claims rather than in fully splitting the single legal personality of the SPC will mean that there will be situations where the SPC is not a satisfactory substitute for a parent/subsidiary structure. Separate legal advice should be taken in each in each instance to ensure that the structure selected is suitable for each clients needs. With the new applications of this innovative legislation and the non-intrusive regulatory approach, the Cayman Islands remains at the forefront of offshore jurisdictions.