Segregated accounts (or cell / portfolio) companies have been on the commercial landscape for more than a decade.
Known as SACs in Bermuda, they are in some jurisdictions described as "cell companies", "segregated accounts companies", or "segregated portfolio companies".
The first public legislation in this area was introduced in Guernsey in 1997, with the Cayman Islands following in 1998 and Bermuda doing so in 2000. Public legislation also now exists in Jersey, British Virgin Islands, Mauritius, Bahamas, Barbados, and in various other jurisdictions, both offshore and onshore.
This article is intended to provide a high level review of segregated accounts legislation in Bermuda, British Virgin Islands, Cayman Islands, Jersey, and Mauritius.
Bermuda
Contact: Michael Burns
The Segregated Accounts Companies Act (the "SAC Act") was enacted in 2000. A segregated account is an account containing assets and liabilities that are legally separated from the assets and liabilities of the company’s ordinary account, called its general account.
Under the legislation, any company to which the SAC Act applies may operate segregated accounts enjoying statutory divisions between them. The effect of this statutory division is to protect the assets of one account from the liabilities of other accounts. As a result, the accounts will be self-dependent, such that only the assets of a particular account may be applied to the liabilities of that account. Previously, such a legal effect was only available by means of a private Act of the Bermuda Legislature (since 1991). The SAC Act may be used for a variety of insurance purposes, including rent-a-captives, life and annuity companies, transformer vehicles, as well as financial guarantee, securitisation and derivatives structures and special purpose vehicles.
British Virgin Islands
Contact: Valerie Georges-Thomas
The segregated portfolio concept became possible in 2002 with the enactment of the Insurance (Amendment) Act 2002.
The Amendment Act was prompted by the competitive demands of the international insurance market, similar legislation in other jurisdictions, as well as a desire to make the existing legislation, the Insurance Act 1994, more attractive to users by enabling them to achieve the specific business solutions that they requested. Under the new law, any insurance company incorporated under the International Business Companies Act, or the former Companies Act may register and operate segregated portfolios, enjoying statutory division between portfolios.
The Cayman Islands
Contat:Sailaja Alla
The Companies Law (2004 Revision) of the Cayman Islands authorises the registration of new and existing companies as segregated portfolio companies. A segregated portfolio company is a single corporate entity with the benefit of statutory segregation of assets and liabilities as between segregated portfolios established within the company, but the portfolios do not themselves have separate legal personality. Provided that contracts are expressly on behalf of a particular segregated portfolio, creditors are entitled to have recourse to the assets of that segregated portfolio and are denied recourse to the assets of other segregated portfolios or the general assets of the company. Segregated portfolio companies were initially only available in the insurance sector but can now be used for any purpose. They are ideal for many sectors, including investment funds, captive insurance companies, multiple tranche debt issue vehicles, securitisation and derivative transactions.
Jersey
Contact: Andrew Weaver
Jersey has taken the concept one step further and has introduced, through legislation incorporated cell companies (ICC) in which each cell becomes a distinct legal entity from the ICC itself. The Companies (Amendment No.8) (Jersey) Law (2005) came into force in February 2006. The legal effect of this piece of legislation is that it allows cell companies to be formed either as protected cell or as incorporated cell companies.
Incorporated cells are distinct from protected cells since the latter do not enjoy separate corporate personality. The incorporated cell may hold assets and sue and be sued in its own name, whereas the protected cell may only hold assets and liabilities.
The structure of incorporated cell companies has the appearance of a parent company with many subsidiaries. There is however, one major difference in that the parent company is not likely to own the cells. The cells may be owned by the investors, whereas the incorporated cell company might be owned by the financial institution which structured the investment product and the vehicle. The ICC is however likely to exercise considerable influence over the incorporated cells.
Mauritius
Contact: George Jones
In Mauritius, protected cell companies (a "PCC") are governed by the Protected Cell Company Act 1999 (the "PCC Act"), which came into force in January 2000 providing a secure regulatory environment that allows for additional opportunities, flexibility and security for international investment structuring and represents a major opportunity for many international businesses in the areas of global insurance business and collective investment schemes. Under the PCC Act a cellular account is an account containing assets and liabilities that are legally separated from the assets and liabilities of the company’s ordinary account, called its "non-cellular assets". A PCC may operate cellular accounts enjoying statutory divisions between accounts. The effect of such statutory division is to protect the assets of one cellular account from the liabilities of other cellular accounts. Thus, the accounts will be self-dependent, with the result that only the assets of a particular cellular account may be applied to the liabilities of that cellular account.
Typically no minimum capital requirement is required, either for a PCC in general or each individual cell, although the Financial Services Commission (the "Commission") may prescribe certain capital requirements on a case to case basis depending on the nature of the business. In the case of insurance and re-insurance vehicles availing themselves of the PCC structure, they must abide by the Financial Services Development Act Regulations 2001 regarding the requirement of minimum paid up capital. For taxation purposes a PCC is treated as a single legal entity, and is nominally liable for Mauritius income tax at the rate of 15%. However a PCC can claim credits for taxes incurred and paid in foreign jurisdictions against the nominal tax payable, with the residual tax burden often being nil as the corporate tax regime in most countries is greater than 15%. A PCC may also claim the credits against any nominal taxes payable on any type of income (ie, interest, royalties, business profits, et al), from any other foreign or source country, benefiting holding entities which derive income from many source countries or business lines. Some PCCs, provided that they are centrally controlled and managed in Mauritius, may also take advantage of the various Double Taxation Agreements which Mauritius is a party to.
A Cautionary Note
Despite the growing popularity of the segregated accounts vehicle, there is one risk that should particularly be borne in mind: the company may operate or have assets, or be subject to claims, in jurisdictions that may not recognise the segregation of assets and liabilities. In those jurisdictions, the assets of one segregated portfolio may potentially be exposed to the liabilities of another. This risk is higher in jurisdictions that do not have segregated accounts legislation, and unfortunately, there has been little case law in these jurisdictions to indicate the manner in which they will deal with this issue.
To reduce that risk, segregated accounts companies should make every effort to hold their assets in jurisdictions that have segregated accounts legislation. Companies should also endeavour to have all of their contracts governed by the law of one of those jurisdictions, and made subject to the jurisdiction of the courts of one of those jurisdictions. Contracts should also contain language that limits the recourse of any potential creditor of a particular cell to the assets in the relevant account.
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.