Knowledge

The purpose of this briefing is to summarise the features of segregated portfolio companies in the Cayman Islands.

It is a general summary of the law and does not constitute legal advice.  If you have any questions about segregated portfolio companies, please contact your usual Bedell Cristin contact.

Introduction

Any Cayman Islands exempted company (the most common form of company in the Cayman Islands, the operation of which must be conducted mainly outside the Cayman Islands) may be registered as a segregated portfolio company (an "SPC") under the Cayman Islands Companies Act (as amended).  SPCs are commonly used in investment fund structures and the insurance industry, as well as more widely in finance transactions and private wealth structures.

An SPC benefits from the statutory ring-fencing of assets and liabilities as between its different segregated portfolios, which is generally considered preferable to contractual mechanisms such as limited recourse provisions.

An SPC operates by creating one or more segregated portfolios (each, an "SP") in order to segregate the assets and liabilities of each SP from the assets and liabilities of the others or from the SPC's general assets and liabilities.  The SPC is, nonetheless, a single legal entity and no SP constitutes its own legal entity separate from the SPC itself.

Registration

An exempted company may apply to the Registrar of Companies (the "Registrar") to be registered as an SPC when it is incorporated or at a later stage.  An application to be registered as an SPC may also be made at the same time as an application is made:

• to re-register an ordinary non-resident company as an exempted company;
• to register a company by way of continuation; or
• to register as an exempted limited duration company.

A fee of US $610 is payable to the Registrar when applying to register as an SPC.  This is in addition to an incorporation fee payable to the Registrar.

Where an existing exempted company is applying to the Registrar to be registered as an SPC, it must:

• file a declaration made by at least two directors setting out an accurate statement:
• of the company's assets and liabilities dated within the three months prior to the date of the declaration;
• of any transaction or event which has occurred or is expected to occur between the date of the statement of assets and liabilities and the date of registration as an SPC which will cause a material change to the assets and liabilities disclosed;
• of the SPs that the SPC intends to operate, and the assets and liabilities which the company proposes to transfer to each SP;
• that, on registration as an SPC, the company and each SP will be solvent; and that:
• each creditor of the company has consented in writing to the transfer of assets and liabilities into SPs; or, alternatively
• notice in writing is sent to each creditor having a claim against the company exceeding US $1,220 and 95% by value of the creditors have consented to the transfer of assets and liabilities into SPs;
• pass a special resolution authorising the transfer of assets and liabilities into SPs (a copy of such special resolution must be attached to the declaration described above); and
• where the company is licensed by the Cayman Islands Monetary Authority (CIMA), obtain CIMA's consent (a copy of such consent must be attached to the declaration described above).

Annual fees and reporting

In addition to the standard annual registration fee payable to the Registrar, an SPC must pay:

• an additional registration fee of US $2,440; and
• a registration fee of US $365 per SP, up to a maximum of US $1,830.

When filing its standard annual return with the Registrar, an SPC must also give the Registrar a notice:

• containing the names of each SP it has created (other than those in relation to which a notice of termination has been given in a prior year); and
• indicating which of those SPs have been terminated since the date of the last notice.

The penalty for failing to give the Registrar the requisite notice is US $12 per day for every day after 31 March of each year during which the notice is not filed.

Shares and dividends

An SPC may create and issue SP shares, the proceeds from the issue of which shall be included in the SP assets and accounted for in the SP in respect of which the SP shares are issued.  Where shares are not issued as SP shares, the proceeds of the issue of such shares shall be included in the SPC's general assets.

An SPC may pay a dividend or other distribution in respect of SP shares, whether or not a dividend is declared on any other class or series of SP shares or on any other shares.

Subject to any rights of particular shares, SP dividends are paid:

• by reference only to the accounts and the liabilities of the SP; and
• out of the SP assets.

Operation and management

Each SP must be separately designated and each designation must include the words "Segregated Portfolio", "SP" or "S.P.".

Any act, matter, deed, agreement, contract, instrument or arrangement which is to be binding on or to enure for the benefit of an SP shall be executed by the SPC on behalf of such SP, which shall be identified and the execution shall specify that it is in the name of or by or for the account of such SP.  The Companies Act specifies a remedial mechanism if this rule is breached.

The assets of an SPC must either be SP assets or general assets.  SP assets comprise:

• assets representing the share capital and reserves (i.e. profits, retained earnings, capital reserves and share premium) attributable to the SP; and
• all other assets attributable to or held within the SP.

The directors of an SPC must establish and maintain procedures:

to segregate, and keep segregated, SP assets separate and separately identifiable from:

• general assets; and
• SP assets of any other SP; and
• to ensure that assets and liabilities are not transferred between SPs or between an SP and general assets otherwise than at full value.

Segregation of liabilities

SP assets are only available to be used to meet liabilities to creditors of the SPC who are creditors in respect of that SP and no other.

Where a liability of an SPC to a person arises from a matter attributable to a particular SP such liability shall extend only:

• to the SP assets attributable to that SP; and
• to the extent that such assets are insufficient to satisfy the liability, unless specifically prohibited by the articles of association, the SPC's general assets.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.