Cayman Islands Segregated Portfolio Companies - Attributes and Uses

By Jonathan Tonge and Alan Craig

OVERVIEW

A Segregated Portfolio Company ("SPC") is a single corporate legal entity with the benefit of statutory segregation of assets and liabilities between segregated portfolios established within the company.

When first introduced in 1998, the use of SPCs was restricted to licensed insurers. SPCs were utilised by insurers to segregate liabilities arising from different insureds or lines of business within a single company. The SPC structure allowed distinct business to be conducted within one company without the risk of losses in one area compromising the overall solvency of the company, its ability to continue in business and to meet its other obligations. The segregation also allowed insureds to better assess the risk profile of the insurer as they required only to review the business of the segregated portfolio through which they were to be insured and to ascertain the sufficiency of the reserves of such segregated portfolio with reference thereto as opposed to conducting an assessment based on the overall business and reserves of the company.

An amendment to the Companies Law in late 2001 removed the restriction on the use of SPCs for insurance purposes only and we have since seen the development of their use in various other sectors. In Mutual Funds SPCs have been utilised to allow for the establishment of segregated portfolios to segregate the assets relating to classes of shares with different investment criteria, thus protecting shareholders from the potential of cross liability arising from the adverse investment performance of other classes of shares. The SPC structure also has application in multiple tranche debt issuing vehicles, securitisation and derivative transactions.

Advantages over traditional methods of creating legal divisions between asset pools (such as setting up underlying special purpose vehicles and negotiating limited recourse provisions with third parties) include greater legal certainty, reduced complexity and administrative cost savings.

CONSTITUTION OF SEGREGATED PORTFOLIO COMPANIES

The SPC concept, under a variety of different names is now familiar in offshore, and some onshore, jurisdictions. The SPC is a single legal entity within which may be established various segregated portfolios. Cayman Islands law provides that assets and liabilities of each segregated portfolio are legally separate from those of the other segregated portfolios. Creditors of a segregated portfolio have recourse to the assets of the segregated portfolio and to any general assets of the company (being assets not comprised with any segregated portfolio) to the extent that the segregated portfolio assets attributable to such portfolio are insufficient and the segregated portfolio general assets exceed any minimum capital amounts required by any regulatory body in the Cayman Islands (so as to allow the continued operation of the company). A recent legislative amendment allows the company to completely remove the recourse of creditors of segregated portfolios to the general assets of the company. With insurance structures it is sometimes preferred that creditors have the ability to make a claim against the general assets so as to establish a degree of risk sharing, hence the ability to completely "protect" the general assets is optional.

In common with other...