Vol 9 (2012) - Issue 5

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Insolvency and Liquidation of Segregated Portfolio Companies in the Cayman Islands

Introduction
In 1998, significant amendments were incorporated into the Cayman Islands Companies Law permitting the formation of a segregated portfolio company ('SPC'),1 principally for use in the insurance industry. In 2002, the SPC provisions were extended to apply to exempted companies.
Since 2002, the popularity of SPCs has gradually increased, including their use in other industries: at present, approximately 10% of mutual funds registered in the Cayman Islands are structured as SPCs.

Purpose of an SPC
The purpose of an SPC is essentially to provide an alternative to a typical multi-class company where the separation of assets and liabilities within the company is achieved by the creation of different classes of shares under the articles of association. The major downside for multi-class companies is that although they operate perfectly well while the company is carrying on business, upon an insolvent liquidation, the segregations break down and all company assets are available to meet all liabilities. To address this shortcoming, multiclass companies typically adopt the rather cumbersome safeguard of including limited recourse and nonpetition clauses in all contractual documents. As with all contractual safeguards, however, their usefulness is subject to drafting or interpretation issues and potential challenges to their enforceability, and there is the additional risk that a contracting party may assert grounds such as estoppel or misrepresentation to avoid such safeguards.
The SPC provisions in the Companies Law (2011 Revision) ('CL') address these disadvantages of multi-class companies.

Features of an SPC
The salient feature of an SPC is that it gives statutory recognition to the distinction between segregated portfolios such that the assets and liabilities of one portfolio are confined to that portfolio.
SPCs are governed by Part XIV of the CL. To take advantage of the benefits conferred by Part XIV, the SPC must be registered as such with the Registrar of Companies.
The starting point is CL s. 216(1) which permits an SPC to create one or more segregated portfolios in order to segregate the assets and liabilities of the SPC held on behalf of one segregated portfolio from the assets and liabilities of other portfolios and also from assets and liabilities which are not held on behalf of any portfolio.
An individual segregated portfolio does not constitute a legal entity separate from the SPC (CL s. 216(2)). Therefore, in order to vest assets or create liabilities in a segregated portfolio, the SPC must enter in the relevant contract on behalf of such portfolio (CL s. 218(1)). Alternatively, the SPC may contract on its own behalf to acquire what the legislation terms as 'general assets' (CL s. 219). General assets are available to meet liabilities of the SPC which are not attributable to any of its segregated portfolios (CL s. 222), and if the articles of association permit, to meet the liabilities of a particular segregated portfolio to the extent the assets of the portfolio are insufficient to satisfy the liability (CL s. 221).
To protect the integrity of portfolio segregations, Part XIV imposes measures to guard against any intermingling of assets. The directors of an SPC have a statutory duty to establish and maintain procedures to ensure that assets of each segregated portfolio are identifiable from the assets of other portfolios and from the SPC’s general assets (CL s. 219(6)).