Recognising Your Limits: The Treatment Of Segregated Portfolio Companies In Onshore Liquidations

Like most other developed offshore jurisdictions, the British Virgin Islands promotes a type of company which seeks to compartmentalise the assets and liabilities of various "portfolios" away from other portfolios and the company's general assets. In the British Virgin Islands these are known as segregated portfolio companies (or "SPCs") but in other jurisdictions the equivalent type of company is often known as a protected cell company or segregated cell company.

For those not already familiar with SPCs, a very brief summary is in order: an SPC is a company which compartmentalises its assets into designated portfolios. A creditor of one portfolio may only have recourse to the assets attributable to that portfolio and (when those are exhausted) to the assets attributable to the company as general assets. However, a creditor will not have recourse to the assets of a different portfolio (which are similarly ring-fenced for the benefit of that portfolio's creditors). But, despite the segregation of assets and liabilities into these different portfolios, the SPC is still regarded as a single legal entity.

However, in the rush to create new corporate structuring products, the draftsmen creating the legislation for SPCs were always left with one nagging doubt: what happens if a bankruptcy court in an onshore jurisdiction simply refuses to recognise the statutory segregation of assets and liabilities? Until that day actually comes, it is impossible to answer that question with certainty, but this article will seek to explore the likely way in which a court in an onshore common law jurisdiction (such as the United Kingdom, Hong Kong or Singapore) may deal with the various issues which would arise in relation to an insolvent British Virgin Islands SPC.

In the British Virgin Islands SPCs are regulated by the BVI Business Companies Act, 2004 (the "Act"). The Act broadly contains three methods by which the draftsmen hoped to secure the recognition of segregation of assets and liabilities.

As a starting point, the statute simply provides that as a matter of British Virgin Islands law creditors of one portfolio will not have recourse to the assets of another portfolio (sections 145 and 146 of the Act). This may be referred to as the "Limited Liability Argument". Secondly, the Act specified that each agreement which an SPC enters into shall have implied into it certain terms, providing broadly that, each party to the agreement accepts and will abide by...